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Real U.S. housing prices will fall another 15 to 20 percent in the next five years, mostly during the next year or two, said Erik Hurst, V. Duane Rath Professor of Economics and Neubauer Family Faculty Fellow.
“That is a take-it-to-the-bank prediction,” Hurst promised during the Chicago Booth 2009 Business Forecast at the Hyatt Regency Chicago on December 3. “Historical national, state, and city housing data predict housing booms, with average price increases of 55 percent, are followed 100 percent of the time by housing busts, with an average price decline of 30 percent. Supply always adjusts in the long run. As you expand supply, prices are pushed down,” he said.
Continued housing devaluation could cause more mortgage defaults, further pressuring bank balance sheets and further slowing the economy in 2009, and uncertainty about lending will potentially lengthen the current recession, Hurst said. “It might take a year and a half to get this uncertainty, which is passed through to consumers, resolved from the economy,” he said.
The good news is that government economists are much better today at managing recessions, Hurst said. “For those of us who are academic economists, this is what we do,” he said. “This is game time for us. This is what our work has been preparing us for during the last 20 years.”
Hurst and Michael Mussa, senior fellow at the Peterson Institute for International Economics, agreed unemployment will continue to rise to about 7.5-8 percent. That rate will settle in mid-2009, but its subsequent decline will be gradual, creating “significant margins of slack” in the U.S. economy through 2010 and into 2011, Mussa said.
Real GDP will drop two percent between mid-2008 and mid-2009, but the economy will recover during the second half of 2009, Mussa said. “The key assumption underlying the present economic forecast is that, with the aid of continued policy activism, credit markets will not return to the extreme turbulence of September and October 2008, but rather will continue to work back toward normal operation over coming months,” he said.
Between mid-2008 and mid-2009, real consumer spending will decline two percent -- the largest decline in real consumption spending in any postwar recession, Mussa said. “This decline reflects the powerful forces that will retard the normally vigorous advance of consumer spending: falling employment, very sluggish growth of household disposable income, and declining net worth due to falling home values and equity prices,” he said.
Global economic conditions have triggered feelings of humiliation, anxiety, and mistrust that will cause tremendous political instability in 2009, said Marvin Zonis, professor emeritus of business administration. “Countries without regularly scheduled elections or with fake elections have no mechanism for the peaceful expression of political rage,” Zonis said.
Marking the 50th anniversary of the Tibetan rebellion and the 20th anniversary of the Tiananmen Square crackdown, China will face “the year of unrest” in 2009, he said. “Some of the unrest will be driven by those important anniversaries,” Zonis said. “But most of the strikes, riots, and demonstrations will be driven by economic unrest driven by rising unemployment, property seizures, and economic hardship.”
In the United States, the “soft power” the Bush administration has been so unsuccessful at exercising will be vastly more effective under President-elect Barack Obama, a former University of Chicago Law School instructor, Zonis said. “Chicago will succeed in winning the 2016 Olympic bid because of this massive increase in the esteem in which the United States is held for having elected Barack Obama,” he said.
—Phil Rockrohr