Yale’s Shiller Still Calling for 20-30% Housing Price Declines

Yale economist Bob Shiller says in the weekend issue of Barron’s that he’s still looking for 20-30% housing price declines over the next 5-10 years — including in untouchable cities like San Francisco and New York (and I’ll include Vancouver):

… THE FUNDAMENTAL FACTOR TRIGGERING the price slump ahead is the fact that home prices have risen to levels far above construction costs, says Shiller. Such an anomaly can’t persist for long, even in what he calls superstar cities like New York and San Francisco that boast a paucity of available land and severe zoning restrictions.

Throughout U.S. history, populations generally have moved to areas with lower housing costs when prices become elevated in hot areas. Then home prices reverted to construction-cost levels, even in the once-expensive markets. This, Shiller thinks, is likely to recur.

He gave a speech recently to an executive group at Bank of America headquarters in Charlotte, N.C. Many in attendance were expats from San Francisco, the bank’s old hometown, and they told him they had adjusted to Charlotte just fine after being uprooted from every American’s dream city. Clearly, migration remains the big leveler in real-estate markets.


  1. This makes no sense. When does the cost of a house not exceed its construction cost?
    I don’t know a lot of people who are moving to, say, Fresno to escape the housing market in San Francisco.

  2. @Jeffrey
    Would you pay more for a home that you could construct for less? I wouldn’t. In cities like NY and SF, this condition can exist because they are land-locked, tightly zoned and highly desirable places to live; but Shiller is arguing that the margin is even out of whack for those rare cases.
    And I do know a lot of people who have chosen to leave SF and the Bay Area precisely because of the cost of living, primarly driven by high real estate prices. While I don’t know any specifically in Fresno (you maybe right on about that), I know plenty in throughout other major cities in the US.

  3. Seems to me that Shiller is off base. There are a slew of factors driving up prices in key cities, like employment, salaries, and other “attractions”. I think the people that aspire to live in SF, NY etc will always outnumber the people prepared to move to Fargo (or wherever is cheapest) to save money.
    I don’t buy this at all…

  4. shiller been saying this for the last 5 years . . . his 20% drop is probably coming finally, but if you cry wolf long enough, a wolf will eventually show up . ..

  5. To the best of my knowledge, Shiller has been predicting a 20% drop for the past 3 years, not 5. It is impossible to time a real estate decline of such magnitude just like it is impossible to accurately predict a market crash. This is why the current forecast has such a wide window. Forget the percentages and forget the timing and you are left with a new construction cost theory that plays well into over developed areas with mediocre demand.
    I wouldn’t count on a 20% drop in NYC East Side, maybe south Bronx! Scarsdale and north is beginning to top as well. Jersey seems to be holding up; actually south Edison is still going up. The more I think about this the more I realize that the whole issue is location sensitive and can not be generalized.
    Disclosure: Opinion of CrossProfit analyst and may not be the opinion of CrossProfit.com.

  6. VennData says:

    The median US housing price have risen a great deal until the last few months. According to OFHEO y-o-y comparison of similar homes Q4 2006 is 1.1 percent. The median price of a sold home was up 5.9% in Q4 of 2006 over 2005. Those increases are decreasing.
    If the argument that house prices won’t come down because they haven’t recently – which is what the discussion / comments here seems to be saying – isn’t logical. If that’s your argument, then when the price of things go up it means it can’t go down.
    If Prof. Shiller has been “wrong” in his prediction for the last three, four or five years doesn’t make the theory invalid. Only time will tell.
    In the mean time, if you believe house prices will return to their recent trend appreciation, it would seem to me that looking at opposing views would be a healthy exercise. If he says that people in the past have moved to lower priced areas after appreciation spikes, then challenge the peer-reviewed papers.

  7. Shiller’s construction-price model is one of his most compelling arguments for the bubble (he has many).
    The point is that if sales price greatly exceeds construction costs, builders will build and arbitrage until supply is so great that prices have to come down. ‘Course it could mean that we’ll just see construction costs skyrocket…
    And of course, @Jeffery, migration is happening from the Bay Area to Sacramento, Vegas, and Phoenix. But that’s actually a flaw in Shiller’s doom scenario. Because when you cash out of a little Bay Area equity its easy to overpay for a mansion in Vegas. Further, the housing market is a lagging indicator of the vibrant economies in these “hot” markets. People are still moving to these markets (from all over the world) for the economic opportunity, home prices be damned.

  8. For what it’s worth, up here in Alberta, the oil boom has driven housing costs through the roof five times over.
    However, the hidden peril is that due to the labor crunch, a lot of slipshod work in plumbing, drywall, framing, and other trades has slipped through the inspections, even (especially!) in the multi-million dollar homes that I work with. I have seen consruction deficiencies that would curl your hair.
    Already, smart shoppers are looking for pre-2002 homes, knowing that the houses that have been tossed up in the past five years are total crap.
    Right now, buyers are agreeing to drop conditions to make the sale, including dropping the inspection. But in a couple of years it will really suck to have a two million dollar mortgage in Calgary, and need half-a-million in repairs before you’re going to be able to list it.