Will Home Prices Fall Another 15 – 25%?

Given that home prices in Chicago have already fallen 30% from the bubble peak it’s hard to imagine that they could fall much further. After all, by my own measures, we are currently almost 19% below the long term trend line. However, the media has recently been giving increased attention to a statement made by Rober Shiller (co-creator of the Case Shiller home price index and author of Irrational Exuberance) on February 22 (when the last index was released) where he said that “There’s a substantial risk of home prices falling another 15%, 20% or 25% more”. His assessment is based upon three considerations:

  1. There are discussions of dismantling Fannie Mae and Freddie Mac, which currently guarantee about 2/3 of all mortgages. Without them mortgage rates will rise to more appropriate levels and could possibly crimp the housing market.
  2. There are discussions of ending the mortgage interest deduction, which could also hurt the market.
  3. Higher oil prices could hurt the economic recovery.

All of these are valid points – but 15 – 25%? Check back tomorrow when I provide an update on how the Chicago real estate market fared in February – an indication of whether or not we’re heading for further price declines.

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