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HAS THE SLUMP IN RESIDENTIAL REALestate hit bottom? The recent news onthe question was, at best, equivocal. Feb-ruary new housing permits dropped2.5% from the month before, while salesin the far larger market for existinghomes rose 3.9% for the month. Like-wise, the sub-prime-mortgage sectorcontinues to dry-heave on rumors ofmore lender bankruptcies and vaultingfuture loan defaults. Yet the stocks ofsome subprime lenders look to have sta-bilized. (For more on this, see page 60.)

To get some insight on what liesahead, we dialed up Yale economist Rob-ert Shiller, the author of Irrational Ex-uberance. Not only did Shiller in thebook predict the impending stock bearmarket (it was propitiously publishedin March 2000), but he also added chap-ters to the paperback version releasedin the summer of 2005, forecasting asimilar fate for U.S. home prices. Bar-ron’s ran a story on that prediction twoyears ago (“The Bubble’s New Home,”June 20, 2005.)

Shiller has published a number of aca-demic studies and papers on historic res-idential real-estate price behavior. He’salso one of the developers of the Stan-dard & Poor’s/Case-Shiller Home PriceIndex, which tracks “same home” pricetrends in 20 leading U.S. metro mar-kets. Futures and options on 10 of thosemarkets currently trade on the ChicagoMercantile Exchange.

Atthispoint,Shillerstillholdstohisear-lier scenario for home prices—a cumula-tive20%to 30%decline in nominal (non-in-flation-adjusted) prices over the next fiveto 10 years. In other words, the slide is un-likely be sudden; prices could fall insteadby, say, 2% annually for 10 years.

Already some slippage in prices isappearing in Shiller’s composite 20-cityindex. The December figures showed a

price decline from November in 17 of the20 markets (the composite was down0.4%), though the December reading wasup a modest 1.7% from a year earlier.

Shiller notes that home prices histori-cally have traced multi-year trends up ordown. For example, prices fell modestlyeachyear from1990to1993, thoughthecu-mulative slide came to just 8% from peakto trough. Then came the blast-off in real-estate prices from 1996 to 2005 that sawthe U.S. enjoy the biggest housing boomin its history, Shiller says.

The fundamental factor triggeringthe price slump ahead is the fact thathome prices have risen to levels farabove construction costs, says Shiller.Such an anomaly can’t persist for long,even in what he calls superstar citieslike New York and San Francisco thatboast a paucity of available land and se-vere zoning restrictions.

Throughout U.S. history, populationsgenerally have moved to areas withlower housing costs when prices becomeelevated in hot areas. Then home pricesreverted to construction-cost levels,even in the once-expensive markets.This, Shiller thinks, is likely to recur.

He gave a speech recently to an ex-ecutive group at Bank of America head-quarters in Charlotte, N.C. Many in at-tendance were expats from San Fran-cisco, the bank’s old hometown, andthey told him they had adjusted toCharlotte just fine after being up-rooted from every American’s dreamcity. Clearly, migration remains the bigleveler in real-estate markets.n

Shiller sees home prices fallinggradually in coming years, by about2% a year. The imbalances will easeas people migrate to lower-cost areas.

by Jonathan R. Laing

Yale’s Robert Shiller called the tech bust.Now he may be right about housing.

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March 26, 2007 B A R R O N ' S 27

Fred SmithFedEx, CEO since ’71

Why: An overnight sensation de-livers the goods in China

As one of the great entrepre-neurs in American history,

Smith pioneered the overnightpackage delivery business in the1970s, expanding on an idea hedeveloped as a student at Yale.

He went on to make FedEx astrong competitor to United Par-cel Service and the post office inground package deliveries. Andhe anticipated China’s economicpotential more than two de-cades ago. FedEx, now the lead-ing international express carrierin China, said last week it willsoon inaugurate next-day domes-tic express service servicing 19Chinese cities.

Not all of Smith’s initiativeshave been successful. In 2004, he paid $2.4 billion forKinko’s, the chain of copier stores whose performancehas been poor. But FedEx profits have tripled in the pastfive years, and Smith usually makes the right moves. Oneof his latest: cancelling orders for Airbus 380 freighterssoon after the company acknowledged production delays.UPS waited until March. —A.B.

James SchiroZurich Financial, CEO since ’02

Why: Repairing a Swiss miss

Call him the Transformer. Inmid-2002, James J. Schiro

took charge of big Zurich FinancialServices during the market equiva-lent of a category-five hurricane.Shares of Europe’s insurers wereat multi-year lows in the wake ofthe Sept. 11, 2001, terrorist at-tacks. In addition, low interestrates and plunging stock priceswere taking a big toll on insurers’investment income.

Schiro moved decisively anddramatically. He refocused oncore markets and products, drop-ping businesses that weren’tmeeting hurdle rates. He also re-paired a sagging corporate bal-ance sheet, instilled financial disci-pline, centralized processes andboosted profitability.

In fact, the U.S.-born CEO’s efforts took the company from aloss of $3.4 billion to a profit of $4.5 billion last year. The stockhas returned some 280% since the lows of 2003.

With operations in Europe and North America, Schiro’sZurich is now pushing into new regions like Russia andlaunching products like pay-as-you drive insurance. The trav-els are sure to be rewarding. —V.J.R.

James SinegalCostco Wholesale, CEO since ’88

Why: Low prices, high profitsand happy workers

Sinegal has demonstrated thatgood treatment of customers

and employees is good for share-holders. The 26 million consum-ers who shop at his discountchain know they will always findbargains—no product is markedup more than 15% above cost.And Costco’s 93,000 domesticemployees know they’ll get gener-ous pay and health benefits com-pared with their counterparts atWal-Mart. Costco picks up 90% ofthe health tab.

The twin focus on shoppersand workers is pure Sinegal. Heco-founded the company and re-peatedly turns aside entreatiesfrom Wall Street to boost profitmargins by raising prices. Sinegal, 71, sets an example by tak-ing a modest salary of $350,000 before options, staying inmodestly priced hotels and putting in 15-hour days to meetan ambitious goal of visiting all 506 stores twice a year. “Jimwould be on any intelligent list of the top 10 retailers of thepast century,” says Charlie Munger, a Costco director who’sbetter known as Warren Buffett’s long-time partner at Berk-shire Hathaway. —A.B.

Bob SimpsonXTO Energy, CEO since ’86

Why: Hitting a gusher of his own

In the past year, Simpson has so-lidified his company’s position

as the country’s best-managedindependent oil and gas pro-ducer. XTO’s proven reservesgrew 12% in 2006 to the equiva-lent of 1.4 billion barrels of oiland its finding costs were half theindustry average.

Simpson does it his own way.In an industry populated by oil-men with Texas-size egos, he is adeliberate, former accountant. Hefocuses his drilling in the suppos-edly mature continental U.S., leav-ing risky projects in the Gulf ofMexico and abroad to competi-tors seeking elusive, giant fields.Says he: “Oil and gas is bestfound where the best oil and gashas already been found.”

The investment community is warming to all this. The stockis up 28% in the past 12 months, beating the shares of DevonEnergy, Apache, Anadarko and others. Though XTO probablywould fetch a nice price in a takeover, shareholders are in nohurry to see a sale because the 58-year-old Simpson continuesto build value. XTO’s stock is up nearly 50-fold since XTO wentpublic in 1993, to a market value of $20 billion. —A.B.

Ratan TataTata Sons, CEO since ‘91

Why: Riding the elephant

Ratan Tata, 69, is the faceof India Inc., overseeing

an empire that includes every-thing from fine tea to IT. Aschairman of Tata Steel—just oneof his roles—he recently drove thefirm’s $12 billion purchase ofCorus, an Anglo-Dutch producerfour times its size, creating theworld’s fifth-largest steelmaker.He also chairs Tata Tea, Tata Mo-tors, and IT services behemothTata Consultancy. He chairs theexecutive committee of Mumbai’sTata Sons, which owns big stakesin all these firms and sets thegroup’s overall strategy.

Ratan Tata worked at a blastfurnace at Tata Steel at the age of26, studied architecture at Cornelland management at Harvard, and became chairman of thegroup in 1991, 150 years after it was founded by an ancestor.India then was emerging from socialism, and Tata was a sprawl-ing network of 250 companies, many doing poorly. Hechopped that to 96 and took Tata Consultancy public. Thoseshares are up 50% since. Not content to operate only in India,he’s challenging managers to expand overseas. —L.P.N.

Jong-Yong YunSamsung Electronics, CEO since ’96

Why: Climbing to the top of theworld, one gadget at a time

Who would have guessedthat Samsung one day

would be as much of a householdname as Sony or Maytag? Thatday is just about here, thanks toYun. Its often-sleek cellphonesrank No. 3 in sales worldwide. Thetech Website CNET loves its LCDs.Its household appliances, includ-ing washers, dryers and refrigera-tors, also rank high with consum-ers in name recognition. And Sam-sung chips are in almost all your gad-gets.

Yun, 63, has been Samsung’schief for more than 10 years. By2006, the company was postingnet income of a staggering 7.93trillion won ($8.4 billion). Thesedays Samsung faces some headwinds. The Korean won hassurged, squeezing export profits. Competition is stiffeningacross the board, and Samsung has been caught up in govern-ment probes of price fixing. But Yun, who steadied Samsungafter the Asia crisis of the ‘90s, could well prevail. Ask him abouthis goal of doubling 2004’s revenue by 2010 and he smiles. “I’mconfident,” he says. —L.P.N.

Annualized Price ChangeOne Year 6.5%While CEO 18.9%S&P 500 9.7%2007 P/E 15.95-Yr. Profit Growth 27.0%

36

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54

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60

80

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$120

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FDX / NYSE 005930 / Korea

300

500

700

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’0720062005100

300

500

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INR900

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TATA STEEL / India

15

30

45

$60

’0720062005

XTO / NYSE

100

300

200

CHF400

’0720062005

ZURN / SWISS

Annualized Price ChangeOne Year 12.6%While CEO 6.3%S&P 500 7.9%2007 P/E 12.05-Yr. Profit Growth NM

Annualized Price ChangeOne Year 28.2%While CEO 30.9%S&P 500 10.7%2007 P/E 11.25-Yr. Profit Growth 59.0%

Annualized Price ChangeOne Year 9.2%While CEO 15.0%S&P 500 10.7%2007 P/E 21.15-Yr. Profit Growth 12.0%

Annualized Price ChangeOne Year 2.7%While CEO 13.7%S&P 500 10.7%2007 P/E 6.15-Yr. Profit Growth 38.1%

Annualized Price ChangeOne Year -17.5%While CEO 27.2%S&P 500 7.9%2007 P/E 10.55-Yr. Profit Growth 7.4%

46 B A R R O N ' S March 26, 2007