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Talk » Market » Discussing 'The notion that home prices always go up is very strong, and very wrong.'

The notion that home prices always go up is very strong, and very wrong.

22 comments

Sage advice from Robert Shiller in January 2005, BEFORE IT ALL STARTED:

http://money.cnn.com/2005/01/13/real_estate/realestate_shiller1_0502/index.htm

It is true that, for the United States as a whole, real home prices were 66 percent higher in 2004 than in 1890, according to the index my research assistants and I have put together. But all of that increase occurred in two brief periods: the time right after World War II and since 1998.

Other than those two periods, real home prices overall have been mostly flat or declining. Moreover, the overall increase, including the booms, is not very impressive -- 0.4 percent a year.

Why then do so many people have the impression that home prices have done so well? People remember the prior purchase price of a home from long ago and are surprised at the difference between then and now. In closing out the estate of an elderly person, one may be surprised to see that he purchased a house in 1948 for $16,000 and that the estate sold the house in 2004 for $190,000.

The appearance is that the investment in the house did extremely well. But the consumer price index rose eightfold between 1948 and 2004, so the real increase in value was only 48 percent, or less than 1 percent a year.

In fact, the theoretical argument that home prices can be expected to appreciate faster than consumer prices in general isn't strong. Technological progress in the construction industry may proceed faster than in other sectors. Barbers and teachers and lawyers are doing things more or less as they always have, but new materials, new equipment and prefabrication help make housing cheaper.

As for land prices, in most parts of the United States there is abundant land relative to demand. There is still plenty of room to spread out. True, there is little empty land available to build on in Los Angeles or Boston, or, for that matter, in London or Sydney.

But when home prices rise to the point that mortgage payments take up a large share of family income, there is a powerful incentive to move to a lower-cost area. This safety valve tends, in the long term, to prevent the price of homes from rising too much and to burst bubbles that have inflated too far.

The increase in home prices since 1980 in Los Angeles has really not been so much larger than in Milwaukee. But Los Angeles has gone through two booms and a crash along the way.

Life was simpler once; one saved, bought a home as part of normal living and didn't think to worry about what would happen to its price. The increasingly large role of speculative markets for homes, as well as of other markets, has fundamentally changed our lives.

The price activity that was once very localized and connected to the building of highways and the like is now connected to popular stories of new economic eras. The changing behavior of home prices is a sign of changing public impressions of the value of property and of a heightened attention to speculative price movements. It is a sign of a bubble, and bubbles carry within them the causes of their ultimate destruction.

there is medication available for this type of OCD

Here is another article from 2005. steve, what happened to the market in 2005 after all of these "economists" predicted the end of the earth? LMAO

http://www.nytimes.com/2005/10/04/realestate/04reals.html

And that article, JM, is correct about everything, including the NYC suburbs, but not Manhattan. As you know, 2006 was a banner year for Wall Street bonuses, based on repackaging junk mortgages that have all gone sour.

Where, pray tell, are Wall Street bonuses going to be this year?

Steve Around 11:00pm please go on another diatribe thats when I have my milk and get ready to go to sleep

Shiller has certainly been a bear on housing for years, but it is easy to stand on the sidelines and point at something you call a housing bubble and quite another thing to call the peak, especially when you are in the business of selling economic data on housing. Predicting the future is a difficult business in the short term, but much easier in the longer term.

I also think that housing is best viewed as an "income" producing asset, not as a "growth" asset. When you own a house, it throws off the "dividend" of you being able to live there. The value of the investment has to take into account the "dividends" that allowed you to live there all those years. Would you be impressed if Morningstar didn't take into account the dividends thrown off by a mutual fund?

Wow, housing returned 12x from 1948 (16,000) to 2004 (190,000), that is very impressive.

Only if you consider a 4.5% CAGR impressive, Popomobile.

I doubt Popomobile did the annual growth math, but in fact what it highlights is that the return over this period exceeded average passbook savings rates. Bank savings aren't impressive either, but it is a product for the average American ... so housing over this period '48-'04 was actually a better investment for the average Joe, if purchased with cash, vs. putting the money in a savings account. That's how the average American should look at an investment in personal housing as an asset class and substitute for renting.

Of course this is in hindsight and past performance is no indication of future performance; savings bank investment can't lose principal so there is no timing risk like that that might be associated with potential anomalous periods in housing pricing; housing may require a bigger downpayment than available at the outset; and, liquidity (ability to buy and sell and cost to do so) of the housing investment is also a factor. Nonetheless, all those caveats built in, over a relatively long period, a person who bought a house did fairly compared to one of his or her other reasonable savings alternatives and rental housing substitutes.

"in fact what it highlights is that the return over this period exceeded average passbook savings rates."

As usual, a specious argument from vverain. You (somewhat) mention, yet (completely) discount, that passbook savings rates a) were regulated for most of that time; b) produces income, which housing doesn't (it's purely an expense); and c) are guaranteed by the government and so are risk-free.

Owning real estate is a risky venture: it is expensive, and highly illiquid, and completely unlike passbooks savings accounts. It's like comparing apples to horses.

Housing does produce income in the context of not having to pay rent. The growth CAGRs Shiller uses are only for the entry and exit values but ignore the annual cash flow savings of not paying rent. Since his calculations are unlevered (ie don't take into account financing), there is no need to include the financing cost (mortgage), but you do need to give credit for the saved rent, offset by operating costs of a house (real estate taxes).

That 4.5% rate of growth is nominal; compound inflation from 1948 through 2005 was 3.75%, so the real rate of growth was .75%.

Do the S&P 500 with reinvested dividends from 1948 through 2005 (moving average) and get back to me.

I like this justaposition of arguments:

stevejhx: Owning real estate is a risky venture: it is expensive, and highly illiquid, and completely unlike passbooks savings accounts. It's like comparing apples to horses.

stevejhx: Do the S&P 500 with reinvested dividends from 1948 through 2005 (moving average) and get back to me.

11% vverain.

What's your point?

Debate has not changed much the past year...

But in fact, so far, so good for those of us living in a reality based world.

http://www.nytimes.com/2008/06/08/realestate/08deal1.html?_r=1&ref=realestate&oref=slogin

That article is about right, except that things are going to continue sideways.

I trust streeteasy's inventory figures more - Miller Samuel is paid by Elliman.

Comment removed.

As restated below, for the average American, according to Steve, the wise course is to invest in the S&P, not in home ownership which has done well over time (even according to Steve's own cited external research) and provides a mechanism for safety and disciplined wealth building. And whereas for the average American, a comparison of saving in a bank and saving in a home is comparing apples and horses, but home ownership is apples to apples with investing in the S&P.

Of course, Steve gets 60% _annual_ returns in his investment portfolio.

VVerain
about 23 hours ago

I like this justaposition of arguments:

stevejhx: Owning real estate is a risky venture: it is expensive, and highly illiquid, and completely unlike passbooks savings accounts. It's like comparing apples to horses.

stevejhx: Do the S&P 500 with reinvested dividends from 1948 through 2005 (moving average) and get back to me.

stevejhx
about 22 hours ago

11% vverain.

What's your point?

"home ownership which has done well over time"

No it hasn't. Read the article.

Steve - "Miller Samuel is paid by Elliman.", what's your source on this ?

Comment removed.

It is not strong; it is wrong, but over time, they go up.

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