Can Chicago Home Prices Really Fall Another 25%

Professor Robert Shiller, who is famous for his analysis of home prices going back to 1890 and inventing the term “irrational exuberance”, is periodically interviewed about his outlook for home prices. He was recently quoted as saying that home prices could fall another 25%. What the…????

Take a look at this follow up interview with the Daily Ticker below to find out what he really thinks. Here are a few of the key points he made:

  • Prices could fall another 10 – 25% in real terms over the next few years. That subtracts inflation so if you tack on another 2 – 3% per year you get the actual price appreciation, which is what most people focus on.
  • It’s really impossible to predict home prices so he’s really not trying to do it.
  • We are living a one of a kind event. No kidding.
  • Bubbles often overshoot the long term trend but there is no hard and fast rule.
  • We are currently close to the long run average but we are still 5 – 10% above it.
  • The American dream of home ownership is a bill of goods we have been sold (I think he means in terms of wealth building).
  • However, home ownership does pay an emotional dividend in terms of freedom and self respect.

Keep in mind that Shiller is talking about national numbers, which I really don’t focus on at all. When you look at where Chicago home prices are relative to the long term trend you see that we have already overshot the long term trend by 25%!

One other thing that Shiller says at the end which is very interesting: He would like to see a plan to develop the financial markets to provide homeowners price protection via financial contracts. What he is referring to here is an idea which he tried to implement through a company that he has an interest in called MacroMarkets. It was actually a brilliant idea that just never got any traction. Basically they created publicly traded contracts that allowed people to bet on future home prices in various key metropolitan markets. In theory it would allow homeowners to hedge against price drops.

I thought it was a great idea. I would definitely use it. The only problem was that it never caught on – possibly because the instruments were fairly difficult to understand. There was very little trading activity and eventually the contracts were liquidated.

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