Q&A with Robert Shiner
Stowe, Robert, Mortgage Banking
Robert J. Shiller is the Arthur M. Okun professor of economics at Yale University, New Haven, Connecticut. He has written on financial markets, financial innovation, behavioral economics, macroeconomics, real estate and statistical methods, and on public attitudes, opinions and moral judgments regarding markets.
Shiller's repeat-sales home-price indexes, developed originally with Karl E. Case, professor emeritus of economics at Wellesley College, Wellesley, Massachusetts, and a senior fellow at Harvard University's Joint Center for Housing Studies, Cambridge, Massachusetts, are now published as the Standard & Poor's (S&P)/Case-Shiller Home Price Indexes. The Chicago Mercantile Exchange now maintains futures markets based on these indexes. The monthly index is regularly headlined in the financial press.
Shiller has produced an impressive volume of distinguished research. His book, Irrational Exuberance, published in 2000, is an analysis and explication of speculative bubbles, with special reference to the stock market and real estate. The New Financial Order: Risk in the 21st Century, published in 2003, is an analysis of an expanding role of finance, insurance and public finance in our future.
Shiller's most recent book, published in 2008, is The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It. It offers an analysis of the most recent housing and economic crisis.
The Yale professor, alternating with Howard Davies; deputy governor of the Bank of England, writes one series of the regular column, "Finance in the 21st Century," for Project Syndicate, which publishes around the world, and contributes to "Economic View" for The New York Times.
Mortgage Banking caught up with him recently at his office at Yale University.
Q: Based on your index of American home prices going back to 198o, where are we now in terms of moving lower to earlier price levels? Are we back to 2002 home-price levels?
A: It's hard to be precise about these things. Looking at the plot, it looks like we're almost back to [the] average level for the century from 1890 to 1990 [see Figure 1]. People would have imagined that there was an uptrend in that period. But in fact, there wasn't. There was virtually no change in real inflation-corrected home prices between 1890 and 1990. And so I think it's meaningful to talk about the level--but only roughly, because we don't measure these things accurately.
But the thing is, that over the century, from 1890 to 1990, land was, of course, getting more scarce. So you might think that home prices would rise in real terms. But offsetting that were improvements in the technology of building homes. And actually, the percentage of home value that is accounted for by land is small--maybe 20 percent. So it just kind of canceled out and there was no change.
It looks like we are almost back [to the average real price for the century]. We are still high, but it's something like 20 percent, 10 percent. I have been quoted a lot for saying that home prices might fall another 10 [percent] to 25 percent. That was just a guess of what might happen. But it's based on this chart [Figure 1]. Actually, I said that [back] in February 2011--I was referring to a decline from the first quarter of 2010. That [degree of potential decline in home prices is] the kind of fall that would get us back to where we were for 100 years.
Q:So that didn't include the decline that has occurred this year?
A: Our national index went down 4 percent in the first quarter. I don't know what home prices are going to do. As I said then, in real terms, they might well decline further. I just don't have any way of knowing. And if you look at this chart, it wouldn't be outlandish to see [prices] fall from fourth quarter of  by 10 [percent] to 25 percent in real terms. I just don't know what [they] will do. …