by Calculated Risk on 12/30/2007 08:13:00 PM

From The Times: Top economist says America could plunge into recession

Robert Shiller, Professor of Economics at Yale University, predicted that there was a very real possibility that the US would be plunged into a Japan-style slump, with house prices declining for years.

Professor Shiller, co-founder of the respected S&P Case/Shiller house-price index, said: “American real estate values have already lost around $1 trillion [£503 billion]. That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars’ worth of losses.”

We have to distinguish between various measures of house prices. Shiller is using the Case-Shiller National index to derive the $1 trillion in lost real estate values. Total household real estate assets were over $20 trillion at the peak, so a decline of $1 trillion is about 5%. (The S&P Case-Shiller national index showed a decline of 5% from the peak through Q3).

Click on graph for larger image.

This graph, from an earlier post, compares the S&P/Case-Shiller index with the OFHEO index.

The Fed Flow of Funds report is more closely tied to the OFHEO index. The most recent Fed report showed a decline of $67.2B in existing household real estate assets in Q3.

We also have to distinguish between lender / investor mortgage related losses (see the previous post on Merrill) and household real estate value losses. The former impacts the credit crunch directly, the later will probably impact consumer spending and the ability of homeowners to withdraw equity from their homes.

As Shiller notes, we could easily be talking about several trillion in lost real estate values. A 15% average decline in prices, would mean $3 trillion in losses. A 30% price decline would mean a decline of around $6 trillion in U.S. household real estate assets.