Shiller: [U.S.] House Prices Still Way Too High

In an interview with TechTicker, Professor Robert Shiller author of Irrational Exuberance and co-producer of the Case/Shiller Home Price Index said U.S. house prices are still way to high.

Shiller said this is the biggest housing bubble in world history and &qout;we are entering a new era in some sense".

The graph above shows how far U.S. house prices have fallen to date.

"[U.S.] Home prices nationally are maybe a little past half way down to trend. The big question if they were coming back to trend we would expect to see them slow down and level off, but they are still overshooting"

This absence of a slow down coupled with the fact the world economy is entering a severe recession, if not a depression suggests house prices are likely to over correct and head down to levels seen during the great depression. If this is the case, then for the US the housing correction is less than half over. When asked if we could over correct, Shiller said "We haven’t seen big bubbles like this"

“The high home prices we saw in the early 2000’s were, I believe a result of a bubble, so the idea we will be back there is not supported by any good economics that I see, and I believe these events are inherently sociological.”

Rents in Shiller’s opinion was another indicator of the bubble.

"Amazing thing is rents didn’t really do much over this cycle, nothing at all like the home prices. So that’s another piece of evidence to suggest it really was a bubble. It was the evaluation of assets, rather than the earnings stream."

As the following graph shows, this was also a phenomenon witnessed in Australia. House prices bubbled, while rents didn’t really do much but tracked inflation.

» Shiller: House Prices Still Way Too High – The Business Insider, 23rd February 2009.