The U.S. housing market still has a long way to fall — and with it the nation’s economy — and China’s economy won’t cushion the blow as it did in the 2001 slump.
That’s the view of two top economists scheduled to make presentations this week at CERAWeek, Cambridge Energy Research Associates’ annual energy forum in Houston.
Robert Shiller, the Yale economist who is widely credited with the earliest warnings of the subprime mortgage crisis, said signs are pointing toward steeper declines in U.S. home prices. Average home prices fell by 8 percent last year, according to the Standard & Poor’s/Case-Shiller index based on 20 big American cities.
“This may be a major turning point where we see years of falling home prices and economic decline,” Shiller, an originator of the Case-Shiller index, said in an interview with the Chronicle.
The U.S. and European economic slowdown that may follow doesn’t appear to be a threat to the surging Chinese economy, however, said Linda Yueh, an economics professor at the University of Oxford in England. China’s economy will continue to grow even as exports fall.
Its growth will be bolstered by the size of its domestic economy, ongoing foreign investments and the boost expected from the 2008 Summer Olympics in Beijing.
China helped cushion the global economy when the U.S. economy last slowed after the crash of the dot-com boom in 2000, but the situation was different then, Yueh said.
“The rest of Asia was recovering alongside China from the currency and financial crises of the late 1990s,” Yueh said. “The region as a whole will still likely continue to grow robustly this year, but it can’t provide the same kind of impetus this time.”
And Chinese consumers cannot make up for belt-tightening among U.S. consumers.
“These consumers are not as rich, and they tend to save more than Americans,” Yueh said. “They don’t have enough purchasing power to make up for the fall.”
Shiller and Yueh will be among economists addressing invitation-only CERAWeek sessions today and open sessions later in the week.
The headliner, former U.S. Federal Reserve Chairman Alan Greenspan, speaks Thursday.
On Tuesday, Kenneth Rogoff, a Harvard University professor and former chairman of the International Monetary Fund, will speak on energy and the economy.
The subprime mortgage troubles began with the lowering of credit standards in residential loan markets in recent years, creating a pool of homeowners who couldn’t keep up with their payments. Those loans were packaged into financial derivatives and sold to investors worldwide, often with credit ratings that are now proving to be overly favorable.
“The rating agencies were a bit complacent in looking at these derivatives, and the public relied on the ratings too much,” Shiller said.
Many banks have reported the scope of their likely subprime-related losses, but there are more to come.
How deep the problem goes will depend, in part, on how long home prices keep falling, and how far.
The last major downswing in the market lasted from 1989 through the mid-1990s. If prices continue to drop at their current pace, they could fall as much as 25 percent, Shiller said.
The Chinese economy, one of the most powerful drivers in the world economy in the last few years, is not exposed directly to the U.S. subprime woes, Yueh said, mainly because its banking industry has not invested heavily in derivative markets.
How far the U.S. and world economies fall will depends, in large part, on consumer confidence, Shiller said. A pickup in consumer confidence after the first Gulf War in 1991 took some sting out of that housing slump.
“I don’t know if we’ll get another event like that,” Shiller said. “Maybe the next election could do it.”
But for now, the outlook is gloomy here and abroad.
Conversations with world leaders at the World Economic Forum in Davos, Switzerland, last month convinced Shiller that officials are more worried about the subprime fallout than they are letting on.
“In face-to-face conversations, they were expressing a lot more doubts than you were seeing in the newspapers,” Shiller said. “I think it’s instinctive for many people to want to show confidence, but I heard a lot of worries.”
While we’ve been pontificating about the housing slump on this blog, for vast majority of the public it’s only now becoming real. And still it hasn’t sunk in yet.
While we’ve been pontificating about the housing slump on this blog, for vast majority of the public it’s only now becoming real. And still it hasn’t sunk in yet.
While we’ve been pontificating about the housing slump on this blog, for vast majority of the public it’s only now becoming real. And still it hasn’t sunk in yet.
While we’ve been pontificating about the housing slump on this blog, for vast majority of the public it’s only now becoming real. And still it hasn’t sunk in yet.
While we’ve been pontificating about the housing slump on this blog, for vast majority of the public it’s only now becoming real. And still it hasn’t sunk in yet.
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