I believe Professor Shiller will prove to be optimistic in his assumption that home prices will fall 10 to 25 percent in real terms over the next few years. First, as we just mentioned our debt is becoming increasingly large and a burden on society. What is rarely mentioned is that after World War II Europe’s industrial sector and also Asia’s sat in ruin. The U.S. had a near monopoly in terms of manufacturing and a massive competitive advantage for decades to come. Today, we have wars that are just as expensive (large parts of the wars remain off balance sheet like shadow inventory) yet will do very little in an economic sense aside from drowning the nation in debt. This I think will be a major point moving forward.
Next, relates to the chart above. There is an incredible amount of shadow inventory. Unlike Japan where culturally there was more internal pressure to pay debts Americans are more prone to walking away and strategically defaulting on mortgages.
Of the over 2 million loans in foreclosure currently over 675,000 people have made absolutely no payment in over 2 years! You might be thinking how absurd this is but that is how things operate today in the Bernanke Matrix. You will also notice in our first chart that actual foreclosures are only a small piece of the pie in terms of distressed inventory. Over 6 million properties are delinquent or in a state of actual foreclosure. REOs, that is banks now owning the property, are a tiny amount since banks don’t want to hold properties on their balance sheet passing homes off like hot potatoes since they will now be forced to mark-to-market (aka come to grips with reality).
Why I think Shiller might be too optimistic is that foreclosures are selling for over 30 percent price reductions and in many areas including California foreclosures are a large part of the market. And what is more important is household income:
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