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Can Americans Stomach a Second Housing Crash?

Professor Robert Shiller, one of the founders of the Case Shiller Index has made recent headlines by stating rather calmly that home prices will likely fall another 10 to 25 percent in the upcoming years. Of course, this can happen either through a nominal drop or through an inflation adjusted drop where prices may remain the same but inflation eats away housing value as the years go rolling by like a tumbleweed.

Now for the agitated nation, I do believe that we will see a further decrease in nominal values but more of the adjustment may come in real terms. However in states like California prices remain extremely inflated that a nominal drop is all but assured. A 10 to 25 percent drop in nominal terms for California seems optimistic. In the U.S. we seemed to pre-programmed to assume that just because prices fall that a strong rebound is assured.

I’m always struck in U.S. movies how the hero always wins no matter what. If you watch foreign movies you realize this isn’t always the case (or just look at life in general). Although we can find many cases of markets rebounding after hard falls, you also have places like Detroit or the NASDAQ where we are eons away from peak prices both in real and nominal terms. Many do not care if things rebound in 30 years especially if they are looking to buy in the next few years. Although Shiller’s statement seemed to be taken as apocalyptic by the media I believe he is being too optimistic.


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