The housing bubble of the early 2000s was "unprecedented" and the "biggest in U.S. history," according to Yale professor Robert Shiller.
As a result, he says "it's very hard to forecast" where housing goes from here, now that it has officially fallen into double-dip territory, based on the S&P Case-Shiller Index.
Housing "might fall [another] 10-25% in the next few years," but forecasting housing today is harder than predicting the weather, Shiller says. "I don't see how anyone can quantify a forecast because it's such an unusual event."
In his latest books, The Subprime Solution and Reforming U.S. Financial Markets, Shiller argues the path to recovery is paved with financial innovation; 11 million homeowners under water is proof "they weren't protected and need a way to hedge their housing risk."
But "the economy is sick right now [and] I don't have any miracle cure," he admits.
Best known for his earlier works, Animal Spirits and Irrational Exuberance, Shiller is arguably the world's foremost authority on financial bubbles. So if he can't predict with any certainty where housing is going, what hope is there for the rest of the punditry?
The American Dream: Myth vs. Reality
One reason Shiller is so renowned is his extensive work on the long-term history of financial markets. Typically, markets fall below their long-term average after bubbles burst, one reason why the bears see much more pain ahead for housing even if prices are now back to 2003 levels. But stocks didn't 'revert to the mean' after the bursting of the 1990's bubble and Shiller says there's no "hard and fast rule."
Speaking of rules, many Americans were raised to believe that housing was always the best investment. But on an inflation-adjusted basis, U.S. home prices were flat from 1890 to 1990, according to Shiller, meaning the whole concept of housing wealth was "a bill of goods."
But the idea of the "American Dream" does have merit. "Home ownership pays a dividend in self respect," he says. Indeed, the idea of owning your own home has personal and societal benefits; the problem was the widespread misconception that housing was the path to wealth and financial freedom.
- Yale professor Robert Shiller
- Irrational Exuberance
- Financial Markets