Economist eyes home value dive: Others skeptical of 50 percent decline

By Edward B. Colby
Saturday, September 1, 2007 – Updated: 08:38 AM ESTThink the subprime mortgage meltdown was frightful? Now consider the prospect of your home losing half its value.

An esteemed economist suggested yesterday that “real home prices” in some parts of the country could drop by as much as 50 percent, posing yet another worry for beleaguered homeowners.

The whopping 86 percent rise in home prices from 1996 to 2006 was “a classic speculative bubble, driven largely by extravagant expectations for future price increases” and not economic fundamentals, Yale University professor Robert Shiller wrote in a paper accompanying his speech at the Jackson Hole Economic Symposium.

As a result, Shiller argued, “the situation may well result in substantial declines in real home prices eventually.”

If a home’s price simply stays level for five years, its “real price” could fall by more than 20 percent during that time because the home value fails to keep pace with inflation.

“He’s sort of like the Al Gore of real estate economics,” said Tim Warren, chief executive of The Warren Group, the Boston-based provider of real estate data. Warren noted that Shiller provocatively “talks a lot about the possibilities of what the future might hold,” as Gore does with global warming.

Warren said he’d be guided more by declines in Bay State home prices during the economic slump that started in 1989.

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