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US expert warns of fresh shocks
Eoin Callan
Financial
Times
Thursday September 20, 2007
Fresh economic shocks on the scale of the current credit squeeze
will occur if US house prices continue to fall, one of the country’s
leading housing experts warned on Wednesday.
Robert Shiller, a Yale university economist, told a US congressional
panel that he feared “the collapse of home prices might
turn out to be the most severe since the Great Depression”.
“The decline in house prices stands to create future dislocations,
like the credit crisis we have just seen,” he told the Senate’s
joint economic committee.
The warning underlines an increasingly widespread view that the
turmoil in financial markets and tightening lending conditions
are early consequences of a slump in the US housing market that
is gathering momentum.
(Article continues below)
Mr Shiller, who designed the respected Case-Shiller house price
index and predicted the bursting of the dotcom bubble in a bestselling
book, said that while there had been a focus “on lax and
irresponsible lending standards, I believe that this loss in housing
value is the major ultimate reason we see a crisis today.”
Alan Greenspan, former Federal Reserve chairman, told the Financial
Times this week that double-digit falls in house prices from their
peaks would not be surprising. A fall in house prices on that
scale would be unprecedented in US history and would have an economic
cost several times greater than the meltdown in the subprime mortgage
market that triggered the current financial crisis.
The Center for Responsible Lending has predicted that foreclosures
on subprime loans will lead to a cumulative loss of $164bn (€118bn,
£82bn) in home equity. Investment banks have suggested the
costs to financial institutions could be more than $300bn.
The joint economic committee heard from experts who said a 15
per cent fall in house prices would wipe out $3,000bn of household
wealth.
Alex Pollock, a fellow at the American Enterprise Institute,
said: “Residential real estate is a huge asset class, with
an aggregate value of about $21,000bn, and is of course the single
largest component of the wealth of most households.
“A year ago it was common to say that while house prices
would periodically fall on a regional basis, they could not on
a national basis ... Well, now house prices are falling on a national
basis,” he said.
Mr Shiller said it was “difficult to predict the depth,
duration and all of the consequences” of the worsening housing
slump.
“The Federal Reserve will undoubtedly take aggressive actions,
which will mitigate its severity. But, if home price deflation
persists or intensifies, they may discover that the Achilles’
heel of this resilient economy is the evaporation of confidence
that can accompany the end-of-boom psychology,” he said.
Senator Charles Schumer, chairman of the joint economic committee,
criticised the handling of the subprime crisis by the Fed and
the Bush administration.
“Despite all the reassuring statements we’ve heard
from the administration that the impact of this mess would be
‘contained’, it has not been contained, but has been
a contagion that has spread to all sectors of the economy,”
he said.
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