The Housing Chronicles Blog: The silver lining of gradual home price declines

Monday, February 25, 2008

The silver lining of gradual home price declines

Dr. Robert Shiller -- co-founder of the S&P/Case-Shiller Index and author of the best-selling book Irrational Exuberance -- has found a silver lining in gradual home prices: that of appropriately mixed-income communities:

Robert Shiller, Yale finance professor and author of the highly touted "Irrational Exuberance" book on asset bubbles, said gradually falling home prices are nothing to fear.

It's the more swift and sharp slide that can undermine housing, and thus consumer confidence and the economy, he said here at a Reuters Housing Summit.

"There's nothing troubling about a gradual correction of home prices. If we keep our incomes at the current level and home prices go down we are richer, we can buy more housing," Shiller said.

"On the other hand, if they fall suddenly and fast then that can bring on recession and that is the worry right now."...

"We want a gradually declining market, we don't want a collapse in our institutions," Shiller said.

"The purpose of this should be to try to maintain confidence, which is a dangerous thing to lose, and we want to also maintain a sense of fair dealing, that we're a society that cares about its people," he added.

The subprime mortgage meltdown spawned a much broader housing downturn, but it has hurt many low-income people, many of whom were taken advantage of by lenders.

"We can't have millions of low-income people be thrown on the streets because of some financial dealings. That would be disastrous to our sense of fairness and cause damage for years to come."...

"In major cities, we see often the service people can't live there any more, the firemen, school teachers. This is not the way we want our society. We want affordable housing," he said.

Shiller said it can't be all or nothing, and that there has been a big misperception that houses will constantly appreciate.

"Some times people will try to imagine that we can have both high home prices and affordable housing. But I can tell you that doesn't add up," he said.

"You either have high home prices or lower home prices and lower home prices are what we want, and people shouldn't be afraid of that," said Shiller. "Most of us care about our children and grandchildren, and these people have to buy houses so why would we want high home prices. We want economic growth, we don't want high home prices."

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