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:
- 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.
- There are discussions of ending the mortgage interest deduction, which could also hurt the market.
- 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.