Shiller is talking about real prices (vs nominal prices).
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Brian, that’s the crucial issue — over 20 years there is a giant different between a fall in real vs. nominal terms.
However, while he was talking about real prices in his 10-25% drop prediction, he didn’t mention real prices when he said they could drop for 20 years. He just said home prices. And he used Japan (where they fell in nominal terms) as a justification for that prediction. So, I think his 20 year decline scenario was in nominal terms.
As pri_dk pointed out, Shiller seemed to be throwing that out as one of many possible scenarios, and probably not the most likely one, so the title of the interview is sensationalist.
Like TG I am a big Shiller fan (btw, thanks TG for the nice shout out). However, I think the idea that prices will drop for 20 years in NOMINAL terms is completely absurd.
Let’s just say that home prices don’t even fall for 20 years — let’s say that they stay the same. At 3% annual inflation compounding for 20 years, that would mean that after 20 years, the REAL value of housing had falling by 75%. To say that prices are actually declining for 20 years, take whatever that 20 year nominal decline is and add it to 75%, and that’s your real decline. That is exceedingly unlikely, to say the least.
The counterargument would be that Japan was in deflation and we too could go into a 20 year deflation, but for reasons I have discussed many times and in great depth, there is no chance that this will happen. No chance. And I think the 3% inflation figure used in the above calculation will almost certainly prove to be significantly low.
Shiller has done some excellent and important work on the topic of valuations and of market booms and busts, but he has his areas he focuses on and areas he doesn’t. Notably, he pays virtually no attention to the imbalances caused by our coming-apart-at-the-seams monetary system (except inasmuch as they have influenced the historical CPI, which to his credit he accounts for). Only by ignoring that topic could he predict a 20 year decline in the nominal price of housing. This blind spot is also imho why he is seeing bubbles where there are none (oil and gold) while ignoring the actual bubble (Treasuries — not really a greed-driven bubble in the traditional sense, but worlds closer to being an actual bubble than oil or gold).
