Economist Forecasts 20 Percent Further Drop in Housing Prices

Economist who predicted subprime mortgage crisis forecasts further troubles.

July 15, 2011 — -- When will we reach bottom in the housing market? With lenders filing foreclosures more slowly and an excess inventory of homes, housing prices could fall another 20 percent next year, says one economist. Gary Shilling, one of the economists who predicted the subprime mortgage crisis, says the "depressing effect" of two to 2.5 million homes in excess inventory will push prices down.

"This would push underwater mortgages from 23 percent to 40 percent of the total, seriously depressing consumer spending, and wreak havoc among mortgages and related securities," he wrote in the July newsletter of his consulting firm, A. Gary Shilling & Company, Inc., based in Springfield, N.J.

Foreclosure filings, in which lenders take back homes with delinquent mortgage payments, decreased 30 percent in the first half of 2011 compared to the same period last year. Banks seized 421,212 homes in the first six months of the year, down from 529,633 in the first half of last year, foreclosure listing company, RealtyTrac Inc. said Thursday.

But questions that began last fall about hastily-signed foreclosure filings, in part, have led to slower approvals. RealtyTrac estimates that 1 million foreclosure-related notices that should have been filed by banks this year will be pushed to next year.

With only 18,000 jobs added in June, the country also has a high unemployment rate at 9.2 percent. Also contributing to a decrease in housing demand is an overleveraged consumer base and home prices that have already seen a double-dip decline, according to the Case-Shiller Index, Shilling said.

"In the past, almost everyone was sure that house prices would never fall, and on a national level, they hadn't since the 1930s," Shilling wrote. "Now everyone knows prices can fall, have collapsed and continue to drop. Who wants to buy an asset that is highly likely to continue dropping in price?"

Shilling said a place to live and a great investment "are no longer contained in the same package," an owner-occupied home. He added the "zeal" to buy the biggest house one can afford is gone and households are seeking smaller abodes.

"So the trade-up housing market is dead," Shilling said.

Steven Leslie, lead analyst with Economist Intelligence Unit's Financial Services Briefing, said he agrees that housing is in a long-term slump.

"We don't think the construction sector is going to come back or industries associated with it, because there is huge overhang," Leslie said.

Leslie said he has "a lot of respect" for Shilling, who is a "big bear on the housing market," but he points out that rent prices have increased. Leslie said rental prices typically have more influence on housing prices than housing inventory.

According to the Consumer Price Index for June, the rent index rose 0.1 percent and the index for owners' equivalent rent increased 0.2 percent.

"With rents going up and people's own economic calculations, it does come to make more sense to buy at some point," Leslie said. "Of course, renting is a very liquid transaction. You can get out of renting quickly. Buying is something you can lose money on, if you get out of it."

While Leslie said he does not forecast a double dip recession, he does foresee a long period of slow growth in the U.S. Leslie said the Economist Intelligence Unit has not calculated a specific percentage by which housing prices could decrease further, though he is "not very bullish either."

"They could go down again, but 20 percent seems like an awful lot to me," Leslie said.