Real Estate Does Not Increase in Value Significantly in the Long-Term

Commercial RE and Amsterdam housing prices in the 17th century aside, does Schiller specifically state that residential real estate in NYC is not a good long-term investment?

Of course it doesn't.

Owner occupied real estate isn't profitable because of price appreciation. Its profitable due to the myriad of tax incentives. Ignore all the tax benefits and I agree 100% - buying is a pure money sink.

Hey, no one is saying real estate is unattractive over the long term! That includes Shiller.

It's not just about price appreciation, it's also about the yield. And under "normal" circumstances the yield on real estate has been quite high. (Recently that has not been the case due to the overvaluation of real estate.)

For individuals, the yield is their renters equivalent yield. (And, of course, even if you own your home outright, there are nice tax benefits. Remember, renters have to earn a lot more pre-tax in order to pay rents with after-tax money.)

i agree with waverly. does shiller say the specific condo I plan to buy today will definitely not be a good investment? if not, then i'll go ahead and buy anyway. after all, my dog-walker's boyfriends' uncle's brother inlaw made a killing in real estate, and that's good enough for me!

A further comment. Historically, the yield on real estate has been similar in size to a nominal bond yield - but it has "largely" grown with inflation - which is something that traditional bond yields have not done.

That yield has been somewhat like the yield on Treasury Inflation Protected Securities (TIPS). These move precisely with inflation - but now yield only 2.25% to 3.00% depending upon maturity. Real estate yields do not move precisely with inflation - and over the long term may, indeed, modestly lag inflation.

In additiion, in a total portfolio sense residential and commercial real estate have been fine diversifiers in a total portfolio sense. (As an example, in 2000 stocks were down 9.1% while REITS were up 26.4%; in 2001 stocks were down 11.9% while REITS were up 13.9%. Alas, it doesn't always work that way - for example, this year!)

This is par for the course with steve - he ignores all real-world practical analysis and bases all his conclusions on out-of-context misapplication of academic papers.

"(As an example, in 2000 stocks were down 9.1% while REITS were up 26.4%; in 2001 stocks were down 11.9% while REITS were up 13.9%. Alas, it doesn't always work that way - for example, this year!)"

But why quote RE bubble years only? the "alas" essentially goes with the bubbles and the statement from the paper that there is " considerable decadal risk." As well as gain. Timing, like in most things, is key.

What Shiller says specifically is that real estate prices do not increase significantly over time, except in recent years.

http://en.wikipedia.org/wiki/Image:Shiller_IE2_Fig_2-1.png

Shiller shows that inflation-adjusted U.S. home prices increased 0.4% per year from 1890–2004, and 0.7% per year from 1940–2004.

That's it. And that's the same conclusion drawn about commercial real estate.

"does shiller say the specific condo I plan to buy today will definitely not be a good investment?"

That is a truly absurd question. He doesn't even know you.

"if not, then i'll go ahead and buy anyway."

Buy away!

"does Schiller specifically state that residential real estate in NYC is not a good long-term investment?"

Another ridiculous question.

Steve seems to be in a "See I am right" kind of mode this morning, so he is posting things to bolster his predictions. That being said, if you want to "prove" that RE in NYC is not a good long-term investment I see nothing in his links to support that.

"if you want to "prove" that RE in NYC is not a good long-term investment I see nothing in his links to support that."

Owner-occupied residential real estate is not an investment. It is capitalized rent and a hedge against risk. Manhattan is no different.

Using the historical p/r ratio as calculated by Fortune magazine, real estate will have to fall by 35% here to approach the 15-year average:

http://money.cnn.com/magazines/fortune/price_rent_ratios/

If you think that an investment that is predicted to fall 35% is a good one, then invest away!

"Does Schiller specifically state that residential real estate in NYC is not a good long-term investment?"

This is not a ridiculous question. You are posting this to bolster your predictions and citing it as a source, so it is a legitmate question. If Schiller doesn't say specifically that residential RE in NYC is not a good long-term investment than what's the point of the post?

Does he say that or not? Do you believe that or not?

steve loves to ignore the fact that Manhattan residential real estate values have grown at an 8-9% average annual rate over the last 40 years.
That's great that you point to a study that looked at values going back to 1890. If we have two world wars and a great depression in the next 40 years, I agree that real estate values will be down.

And what if the 11.7 p/r ratio is not an accurate number going forward? What if the ratio for NYC is 16 or 17? Then that changes things significantly, since we were at 17.8 last year.

In fact, it is much higher than that historically for many other large cities.

But, isn't there a value in being a hedge against inflation, if nothing else? I'm probably thinking more of commercial RE.

I think I see what you mean: the greatest value of owner occupied housing is that it protects the owner from rising rents. But, if owner's monthly costs exceed rent (now & in the future), ownership is less attractive. Is this the gist of what you're saying?

"But why quote RE bubble years only? the "alas" essentially goes with the bubbles and the statement from the paper that there is " considerable decadal risk." As well as gain. Timing, like in most things, is key."

OK. Let's try some more years.

1977, stocks -7.3%, REITS +22.4%
1981, stocks -4.9%, REITS +6.0%
1981, stocks +6.1%, REITS +20.9%
1992, stocks +7.7%, REITS +14.6%

For the period Dec 71 to Oct 08 the correlation between stocks and equity REITS has been +0.55. That's a good diversifier over the long term.

Penultimate line of table should read 1984, not 1981.

"If Schiller doesn't say specifically that residential RE in NYC is not a good long-term investment than what's the point of the post?"

Maybe you'd like the question to be more specific: what does Shiller think of apartment 3D on the corner of Park Avenue South and 22nd Street?

That's why your question is ridiculous.

The p/e ratios are there. Draw your own conclusion.

"What if the ratio for NYC is 16 or 17? Then that changes things significantly, since we were at 17.8 last year."

And what if they're 8, as they were in 1998?

Don't get angry becasue aomeone is questioning how you are interpreting data. You read that and come to an absolute conclusion, but there are many people who read that and come away with different conclusions or even more questions.

You site this as "proof" of something, yet get snippy when it is shown to not be as concrete or relevant as you give the impression it is. This is proof os nothing. It is one more piece of data to be considered and analyzed with a whole bunch of other data.

waverly, I'm not getting snippy at all. Nor am I angry. Actually, I'm rather amused.

"there are many people who read that and come away with different conclusions or even more questions."

You?

And yes, the data are conclusive, and consistent. And yes, Robert Shiller has stated that stocks are a far better investment than owner-occupied residential real estate. Read the article.

Does he mention Manhattan? Not that I know of. Nor do I know if anyone has ever asked him that question. Nor do I think it's necessary. Real estate is clearly cyclical - residential and commercial. The evidence is conclusive, as it is conclusive that we are on the downside of that cycle. You can disagree. During the dot.com boom people thought that worthless stocks were actually worthful.

Not.

"Maybe you'd like the question to be more specific: what does Shiller think of apartment 3D on the corner of Park Avenue South and 22nd Street?"

The question is also fair because you are, in essence, taking Schiller's statement and saying with absolute certainty that apartment 3D on the corner of Park Avenue South and 22nd Street is 50% overpriced....and THAT is pretty ridiculous.

"The question is also fair"

I never made any such claim on any particular apartment. In fact, for a year I have said that overall market data may not be directly applicable to any particular unit. What I am saying is that the market as a whole is overpriced. By 50% when compared to rents, to p/r ratios, to any number of other measures that I've cited. But that does not mean ALL apartments are.

You really need to stop hyperventilating and read what I write carefully. It appears to have gone over your head.

keeping up with inflation is a heck of a performance.
and because most RE is bought with leverage the actual cash/cash returns are HUGE.
If it is rented out the returns can be fabulous.
a landlord in business in NYC for 20 years (more than an up/down cycle) is wealthy.

We're talking about owner occupied real estate ONLY, right?

Yes, malraux. As you know, the primary benefit of investment property is that somebody pays down your principal. That offsets the lack of appreciation in the long-term (under normal market conditions).

I'm all for investment real estate, as long as your costs are covered on a cash-flow basis from Day 1.

steve: Roger that, over and out.

> does Schiller specifically state that residential real estate in NYC is not a good long-term
> investment?

He does elsewhere, actually. He ties it to income levels, which he has shown that RE markets generally trend with.

I'm glad we agree on that, malraux. It's also why commercial real estate generally does not appreciate much, as noted in the OP. Someone's paying the principal down, so if the property value increased at the same rate as, say, stocks, where no one pays down the nonexistent principal, then everyone would pile into property.

Which would increase its cost and lower its return, until, over time, overall, it equaled equities.

All asset classes yield the same over time. Owner-occupied residential real estate is not an asset. It is capitalized rent as a hedge against rent risk.

nyc - no doubt that real estate trend with disposable incomes. I would say disposable incomes x leverage.

Both in Manhattan are currently falling.

"steve loves to ignore the fact that Manhattan residential real estate values have grown at an 8-9% average annual rate over the last 40 years. That's great that you point to a study that looked at values going back to 1890. If we have two world wars and a great depression in the next 40 years, I agree that real estate values will be down."

And we may have an RE value correction like those other large events right now.

Topper's analysis is a better one, showing that as long as you stay out of the down turns, it is a good investment. But that still means you need to know when to get out. The pattern seems to be steep appreciation, followed by massive fall, so that the long term average is fairly flat.

Over the long term (meaning really long term, which, essentially isn't very meaningful for the average person and their lifespan, although for a company, that is perhaps different), equities seem to outperform RE.

Or so is my reading of the number thrown up here.

"equities seem to outperform RE."

Equities ALWAYS outperform RE over the l/t.

non leveraged equities outperfom non leverage RE.
very few people buy RE non leveraged

This is flat out wrong:

Stevejhx: "All asset classes yield the same over time"

Not even close..You can be a bit more accurate by speaking to risk-adjusted returns, but asset classes most certainly DO NOT yield the same over time. Otherwise, the whole notion of capitalism is bankrupt. Higher returns must be the end reward for taking risk

Real Estate Does Not Increase in Value Significantly in the Long-Term

This is just another stupid title. Nothing increases significantly over the long-term. Over the long-term a pool of assets will increase based on an increase in population plus an increase in technological improvements and other efficiencies (e.g. transportation).

Stevejhx: "All asset classes yield the same over time"

Entirely untrue. I'm sure it doesn't need too much explanation and I'm sure even a half-wit could figure it out with a little bit of thought.

"You can be a bit more accurate by speaking to risk-adjusted return"

Agreed.

"asset classes most certainly DO NOT yield the same over time."

They must. That is the definition of capitalism. If something yields too much, money will pour into it.

"Nothing increases significantly over the long-term"

Wrong. Anything that makes money increases over the l/t.

Actually,

They "Must" not. The varying returns across asset classes reflects many things, risk, productivity, scarcity (supply/demand) and your definition of capitalism applies for "excess returns,' NOT equal returns.. Excess returns are measured commensurate with risk, so capitalism (academically) attempts efficient allocation of resources by the reward of higher return for taking that risk. It must be so, and it certainly has been for the last 75 years....

http://www.duke.edu/~charvey/Classes/ba350/history/history.htm

As for the more practical point, focus on margin of safety- aka- buying the "cheap" asset, no matter the class, and your returns can absolutely increase significantly over the long term...

Adjust them for risk.

How many different things can steve be wrong about in one day? I've lost count already.

"They must. That is the definition of capitalism. If something yields too much, money will pour into it."

oh ok, equities and fixed income yield the same. Good thinking.

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How many different things can steve be wrong about in one day? I've lost count already.

Steve is right more than the average poster on streeteasy. Just works out by law of the loudmouth. Average person who posts here will say 3 things in a day and be right about 2 of them. Steve says 100 things a day is correct 10% of the time. 10% of 100 = 10 which is greater than the average person's 2.

take for example these two comments from steve:

#1 is the header to this discussion:
Real Estate Does Not Increase in Value Significantly in the Long-Term

#2 is the recent comment:
Wrong. Anything that makes money increases over the l/t.

I wonder if steve translates into Spanish then to Portuguese and then into Latin before translating back to English, and with all that translation we get such inconsistent and flawed thinking.

"Steve is right more than the average poster on streeteasy. Just works out by law of the loudmouth. Average person who posts here will say 3 things in a day and be right about 2 of them. Steve says 100 things a day is correct 10% of the time. 10% of 100 = 10 which is greater than the average person's 2."

Actually, not sure he is... he has the worst % in town. He got "Manhattan prices will decline" before they did, but that wasn't that hard to see, lots of folks called it.

But, since then, he has made 3 major calls on the stock market and been perfectly wrong. He called sell right before the bailout bounce, then said buy right after the bailout (then the market lost another 10-15% or so), then at the last bottom, he said we were going to 6500, right before the market bounced to 8700.

He's less accurate than a broken clock (only right once every 6 months).

The classic way of looking at returns is in terms of "Sharpe ratios."

How much return do you get per unit of risk?

The basic formula is: Annualized Return "minus" Risk-free Rate (T-bills) "divided" by Risk (expressed as standard deviation of returns).

Historically, most asset class returns have, indeed, had approximately the same "return per unit of risk."

Some would argue that certain asset classes "should" have lower Sharpe ratios as they are particularly good "diversifiers." Empirical evidence, however, has suggested that asset classes have largely been priced on a standalone basis. (As such the phrase, "diversification is the only free lunch," as it can reduce volatility without reducing return - and hence improve "portfolio" Sharpe ratios.)

Bottom line for real estate - over the long term a fine asset class with a competitive Sharpe ratio. But don't ignore explicit or implicit income from real estate - it's not just price return! In addition, both residential and commercial real estate have also been fine diversifiers versus both stocks and bonds. (Surprisingly, over the long term residential and commercial real estate have often - even if not currently - moved in different cycles.)