Sunday, August 21, 2005

Historical Data Shows all Housing Booms Followed by Busts

This New York Times article focuses on Robert Shiller, the man who identified and warned about the crash of the technology stock bubble and who now warns of the impending collapse of the housing bubble. Dr. Shiller has collected historical data (going back centuries) showing that housing boom periods are always followed by painful busts and, contrary to what an RE bull will say and certainly contrary to what any realtor will tell you, housing is not a particularly good investment over the long term as house price increases just track with the increase in wages/salaries.

Some choice quotes:
"...Mr. Shiller is sounding the same warning for real estate that he did for stocks. In speeches, in television and radio interviews and in a second edition of his prophetic 2000 book, "Irrational Exuberance," he is arguing that the housing craze is another bubble destined to end badly, just as every other real-estate boom on record has."

"He predicts that prices could fall 40 percent in inflation-adjusted terms over the next generation and that the end of the bubble will probably cause a recession at some point."

"To Mr. Shiller, though, it is a question of history, not salesmanship. Most people have never looked at decades and decades of home prices, because such data have been almost impossible to find. Stock-market charts often go back almost a century. Housing charts typically start sometime in the distant decade of the 1970's."

"But Mr. Shiller has unearthed some rare historical housing data for other countries. Using old classified advertisements, he was then able to fashion a chart for the United States that goes back to the 19th century."

"It all points to an unavoidable truth, he says. Every housing boom of the last few centuries has been followed by decades in which home values fell relative to inflation. Over the long term, the portion of income that families spend on their shelter stays about the same."

"The beauty of the [Shiller index] is that it does a better job of capturing the experience of homeowners than a simple average of house prices does. That average can rise when a bunch of new McMansions get built, even if existing houses have become no more valuable. The Shiller index, by following the same set of houses over many years, tracks the actual financial return that houses produce for their owners."

"Again and again, the cycle repeats itself. But there is essentially no long-term trend, beyond a general rise in house prices that roughly matches gains in peoples' incomes. As Amsterdam became a global city and its population exploded, demand for homes increased - but so, too, did supply."

"PRICES have hardly become more stable over the last 400 years; in fact, they've jumped up and down more in the 20th century than they did during the 18th and 19th."

""A whole lot of the price increases you see in houses is imaginary, because it's just inflation," said Mr. Eichholtz, a professor at Maastricht University. "People say, 'I have a house. It protects me against the economic imbalances or misfortunes of the country.' The big lesson is that real estate does not give you the protection that people think it does.""

2 Comments:

Blogger fredtobik said...

"Mr. Shiller is sounding the same warning for real estate that he did for stocks. In speeches, in television and radio interviews and in a second edition of his prophetic 2000 book, "Irrational Exuberance," he is arguing that the housing craze is another bubble destined to end badly, just as every other real-estate boom on record has."

Selling fear is easy, Bush did it.

Aug 21, 2005, 11:13:00 AM  
Blogger marin_explorer said...

The difference being, Schiller made a good call on the dot-com bust, while Bush did not on Saddam's "WMDs".

Unless someone is blindly optimistic, there's plenty of rational reasons to worry about this present housing "boom". These boom/bust cycles return when people don't adequately assess risks.

Aug 21, 2005, 2:02:00 PM  

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