US homes may lose as much as half their value in some US cities as the housing bust deepens, according to Yale University professor Robert Shiller. Meanwhile, Martin Feldstein of Harvard University says that experience suggests that the dramatic decline in residential construction provides an early warning of a coming recession. The likelihood of a recession is increased by what is happening in credit markets and in mortgage borrowing. Feldstein says that most of these forces are inadequately captured by the formal macroeconomic models used by the Federal Reserve and other macro forecasters.<\/p>\n
\u201cThe examples we have of past cycles indicate that major declines in real home prices \u201d\u201d even 50 percent declines in some places \u201d\u201d are entirely possible going forward from today or from the not too distant future,\u201d\u009d Shiller said in a paper presented last Friday at the Federal Reserve Economic Symposium in Jackson Hole, Wyoming.<\/p>\n
Falling real-estate values may undermine consumer spending by spurring households to save more and by preventing them from tapping home equity.<\/p>\n
Because price gains were larger and more widespread this time compared with past speculative booms, the risk of \u201csubstantial\u201d\u009d price declines is greater, wrote Shiller, who is also the chief economist and co-founder of MacroMarkets LLC. Shiller is also the author of Irrational Exuberance, in which he forecast the end of the tech boom in 2000.<\/p>\n