Gradual home price drop good: Yale's Shiller

By Lynn Adler

NEW YORK (Reuters) - Robert Shiller, Yale finance professor and author of the highly touted "Irrational Exuberance" book on asset bubbles, said gradually falling home prices are nothing to fear.

It's the more swift and sharp slide that can undermine housing, and thus consumer confidence and the economy, he said here at a Reuters Housing Summit.

"There's nothing troubling about a gradual correction of home prices. If we keep our incomes at the current level and home prices go down we are richer, we can buy more housing," Shiller said.

"On the other hand, if they fall suddenly and fast then that can bring on recession and that is the worry right now."

A housing boom that lasted nine years is now unraveling.

The economy is "probably on the brink of recession," Shiller said.

The most recent Standard & Poor's/Case-Shiller 20-city home price index released in late January showed an annual 7.7 percent price drop in November.

Still, that slide pales in comparison with the surge registered in the nine years of the housing boom.

From December 1997 to December 2006, home prices spiked up 147 percent, an S&P spokesman said in a telephone interview.

The value of U.S. homes has eroded by about $1 trillion from the peak through the third quarter, Shiller estimated.

Without forecasting the ultimate drop during this cycle, Shiller said there is a tendency for momentum in house prices.

But a slow price descent could put the market and the economy back on the right path.

"We want a gradually declining market, we don't want a collapse in our institutions," Shiller said.

"The purpose of this should be to try to maintain confidence, which is a dangerous thing to lose, and we want to also maintain a sense of fair dealing, that we're a society that cares about its people," he added.

The subprime mortgage meltdown spawned a much broader housing downturn, but it has hurt many low-income people, many of whom were taken advantage of by lenders.  Continued...