Robert Shiller Admits Painful Truth: Housing Wont Recover Soon

Having briefly seen this interview with Professor Shiller, I sat with the depressing feeling of having watched two zombies trying to squeeze some hope of a life – because a truck drove by and shook their pacemaker. Consequently: They were asking the wrong question to a professor that answered beside the point on wrong premises.

1. The assumption was that there was going to be a recovery – ever. That is not in evidence. That it in some sense always have recovered – that may be debatable in f.i. Rome, Italy where cows grazed in the present city centre in the 18’hundreds. This only to say that it is a common phenomenon that cities die. Sometimes they recover, sometimes they don’t. Not so long ago Bristol was the second largest city in Great Britain.
2. The debate concentrated on jitters on a plateau – where the interviewers desperately tried to commit Professor Shiller to feeding their fantasies. Professor Shiller wasn’t lured into that, as he very well know that recoveries take a very long time. Provided they come.
3. Then Shiller refers to the last refuge of the ignorant professor: Psychology! He even mentions gas prices!

If you look at the postdiluvian index, where house price drops are measured from the top – following characteristics can be observed:

1. There are more similarities between countries and areas than there are differences.
2. There are differences in timing between different areas as to when the top occurs – and that evens somewhat out in a composite index.
3. There is a distinct plateau after a price drop of around 20-30%.
4. There is a period of up to 3 years before prices either recover or start dropping further.

After slowly uncurling the toes, let’s look at some more basic and substantial explanations:

1. The reason for the breaking point is normally very simple: Banks finance – generally under falling real interest rates – until they give loans to incomes that have no real hope ever being able to pay the service on loans in that magnitude. Coming from a low interest rate scenario the present is a lot worse than earlier housing crisis. This is due to the fact that high inflation and high nominal interest rates do carry an accelerated amortisation.
2. The price drop of 20% or slightly higher is the maximum that banks and mortgage bank can suffer and still maintain the illusion of surviving. It is an illusion:

1. The banks survived in Sweden (they had a bust in the beginning of the 1990’ies). Or did they? To this day the Swedish banks are partly state owned – Nordea has about 20% state ownership and SEB totally destroyed one of the wealthiest families in Sweden (the Wallenberg’s). Today they are perhaps not destitute – but close.
2. The German housing market never really survived the determined action of Ludwig Erhard under de facto American military dictatorship. To this day the German rent his dwellings – and rent control has not been a “solution” offered. To rent your dwelling carries no social stigmata in Germany.

No, to say that banks survive a 20% drop in housing prices is a truth with modifications. The truth is: They will crawl along with their broken backs and fictional book values.

3. The period of “grace” depends largely on the financial state of their mother country and the state they went into the crisis with. Nobody can in good faith claim that Spanish banks were anything but a disaster prior to 2008.

There can be temporary price rises in the plateau years; but that is mainly due to the various tricks bank have to conceal losses – selling to dummy housing agents, servicing debt with increasing loans to the debtor – yes, the bag of tricks is large.

The prices in the US have a general downward trend, which I attribute (until somebody can come up with a better explanation) to the “jingle mail system” where some losses will have to be taken.

Another factor in the length of the period of “grace” is to what extend death puts houses on the market.

4. However reluctant I am, I will have to address “psychology” as an explanation: This is a case where the cart is put before the horse.

1. People “prefer” to live in the city centres on 60 square meters with 2 children? Hardly – it is more a question of ability: Either they can’t move from an owned condominium due to insolvency OR they will never get the loan for a house so obviously overpriced.
2. “Lack of optimism” – well it is difficult to maintain a cheerful disposition when you’ve ruined yourself and your family for the next 30 years – desperately trying to avoid eviction.
3. “Risk aversion” is hard to avoid when you see around you desperate people that have taken the plunge into the pool without water.
4. If your job was due to a general overspending financed by raising house prices and irresponsible banks – then it was only a matter of time before distress sat in. You can’t take a pay cut – you are too much in debt.

The hardest thing to suffer is the ridicules cheerful optimism: We will get through it all and on the other side of the depression things will be better! These attitudes simply overlook the fact, that what took the USA out of the depression was the rearmament for WW2 – now something similar is hardly likely to happen though nut-cases strut around in various parliaments. Not that fundamentalism cannot cause grief; but on a scale of a world war?