I had the privilege of interviewing Yale professor Robert Shiller the other day for Yahoo's TechTicker.
Shiller called the top of the stock market in 2000 (Irrational Exuberance) and the housing market in 2004 (second version of Irrational Exuberance), and he also created the Case-Shiller indices that track house prices across the country.
In his new book, The Subprime Solution, Shiller observes that house prices dropped 30% in the Great Depression. In our current housing bust, they've already dropped 20% (24% after adjusting for inflation), and the rate of decline is only now beginning to peak. It is highly likely, therefore, that the decline in US house prices this time around will be worse than it was in the Great Depression.
This decline will not only punish those who can't keep up with the mortgage payments and are forced to sell their houses. It will hit consumer spending (via the reverse wealth effect), and it will wipe out the home equity of tens of millions of Americans (we're at 10 million already). It will also take a long, long time for house prices to recover, especially after adjusting for inflation.
Shiller's outlook on the housing market is far more pessimistic than the current consensus, and unlike the forecasts of many analysts, it's also supported by a deep command of the facts. Warning: Don't watch the video below if you're prone to depression:
See Also: About That Stock Market Crash...
