Tuesday, April 11, 2006

Shiller Interview

Here is a brief interview with Robert Shiller.

Some choice quotes:

What's the most important mental mistake that people make as buyers or sellers of homes?
At the present time, it is the mistake of thinking that homes will generally be a terrific investment. People typically think that home prices will go up at something like the return on the stock market. If home prices had done this for the last century then their real value today would be roughly a thousand-fold higher, while our real per-capita incomes are only about 6-fold higher. That is clearly not what happened -- it would mean that practically none of us could afford homes today. Quite the contrary, we are able to afford much bigger and better homes. Homes are a manufactured good, and in the long run construction keeps prices down.

What do you think is the strongest evidence that we're in a housing bubble?
Speculative booms and busts have been in the housing market from time immemorial; the only thing that is new now is the national -- and international -- character of this boom. The pattern of speculation should be well known to people who read history, though most people don't.

We see immense public excitement, scrambles to invest in homes amidst rising prices and rising construction activity. The excitement is sure to fade, just as supply comes on line. Of course, speculative booms have not always ended in busts. There have been soft landings as well as busts, and no one can be sure what will happen this time. That is why we need new markets that will help us by delivering market expectations for future dates.

You've written that consumption doesn't fall as much in a housing bust as it rises in an up market. Does that mean we don't have to worry about a big hit to the economy if a housing bubble bursts?
It is true that people will try to maintain their standard of consumption even if home prices fall. This time, however, they are starting out with a personal saving rate that has been very low -- negative in 2005. So, there may be bigger contractions in consumption this time. There is cause for some worry: Housing busts have been a leading indicator of recessions. Monetary policy has improved, though, and with [Fed Chairman] Ben Bernanke at the helm, maybe the economy won't take a big hit even if there is a housing bust.

16 Comments:

Blogger Michelle said...

It's weird, but out here in Minneapolis, the apartment prices almost seem to be working in a renter's favor.

Apr 11, 2006, 7:46:00 PM  
Anonymous by_palladium said...

Here in marin too. I mean, it is not a problem to rent a 3/1 house that has a "market value" of 1.2M for about $2100 per month. I doubt an ARM could touch that.

That ought to tell you that there is something very wrong with the real estate market.

Apr 11, 2006, 9:06:00 PM  
Anonymous Pradeep Aggarwal said...

Nice blog.

And good information too. I’ll keep visiting often.

Thanks

Apr 12, 2006, 12:46:00 AM  
Blogger Bubble-X said...

The key sentence to me is "The pattern of speculation should be well known to people who read history, though most people don't." That is so true- if people did know history, there is little chance things would have gotten so out of control.

-X

bubbletrack.blogspot.com

Apr 12, 2006, 11:44:00 AM  
Anonymous rejunkie said...

By_palladium-

If you can get that you have a very uneducated landlord -- my house in San Anselmo (a 3/2 BTW) that I bought last summer for $865k rents for $2800 (Gross Rent Multiplier of 26) and the condo I sold in Novato in January for $540k rents for $1775 (also a GRM of 25) and my condo in SR that I would ballpark is worth $470k rents for $1500 (GRM=26).

Using your example house valuation of $1.2M, the rent should rent for $3800-ish.

Rents are still relatively cheap in Marin but they aren't that cheap.

Apr 12, 2006, 5:52:00 PM  
Anonymous Caddis said...

17% affordability. If you understand that historically in California, you'll know a lot more than most.

Apr 13, 2006, 7:10:00 AM  
Blogger sf jack said...

junkie -

Not this again.

I think I will leave the City for Marin in order to find myself an "uneducated landlord" (since neither the job at Google nor the Mommy-Daddy downpayment hasn't materialized yet since finishing grad school).

You've mentioned before the appearance in Marin of the "uneducated landlord" - I'm interested as to why you seem to think they exist or are so common.

Do you have any explanation for this (in the county with the highest median income in the United States - hence, perhaps, some intelligent people are residing in Marin)?

I think what you are calling the phenomena of "uneducated landlords" is actually a reflection of house prices being extraordinarily above the historical mean, more than anything else.

Since we can estimate that by_palladium's $1.2M place was probably in the range of $900K not too many years ago (while his/her's rent was unlikely to be that significantly different back then) - does this make the landlord necessarily "uneducated" today because he/she has not been able to raise rents commensurate with the change in home prices?

I would think not. Instead it's entirely possible that many Marin landlords cannot command more rent because there is not more rental demand for their places.

Apr 13, 2006, 10:53:00 AM  
Blogger sf jack said...

I just lifted this from Ben's blog:

"Robert Campbell, an independent San Diego economist, said there is plenty of reason for concern. ‘Real estate is a highly cyclical market,’ Campbell said. ‘From this point in time, it’s only going to get worse. The good times are behind us. The money’s been made. The market only gives so much before it starts taking away.’

Campbell suggests the San Diego County market is out of whack because median family income is roughly half the pay it takes to buy the median-priced home, and today’s prices trigger mortgage payments generally twice what properties can command in the way of rent. ‘Eventually, all markets will come back to equilibrium,’ he said."

*********

What's the story in Marin?

Approximately $140K median family income needed for the median home; and actual median income is what, $90K?

Perhaps the "uneducated landlords" of Marin will become smarter after home prices retreat.

Apr 13, 2006, 11:02:00 AM  
Blogger sf jack said...

"since neither ... hasn't materialized yet since finishing grad school"

Should read:

"... have materialized..."

And no, I've never tried to be employed by Google nor any like firm.

Apr 13, 2006, 11:10:00 AM  
Anonymous rejunkie said...

sfjack-

I am just looking for the facts, not hypothesis or conjecture. When someone says "it is not a problem to rent a 3/1 house that has a "market value" of 1.2M for about $2100 per month", it makes it sound like a typical experience when my own personal experience with three properties (and, the 7 others my parents own) would indicate otherwise.

For sure by_palladium could have a deal, or have heard of a deal, or could have been in the house for 10 years with few rent increases, but that does not mean that property is renting at market value (and therefore is not typical), as I have 10 data points (not facts, but a lot closer than an assertion like this). So, fair enough, there are two reasons it doesn't rent at market value:

1. Uneducated landlord
2. A good landlord (and somewhat generous) with good tenants.

I would (and do) let rents lag the market for my long-term tenants too because good tenants are hard to come by and vacancies are expensive (although 45% below market is being a bit too kind -- it is an investment after all). Having said that, the last time I was able to raise the rent on an existing tenant was in early 2001 -- which means the rents I cite have been that way for 5 years, when by_palladium's place (or place he/she heard of) was worth somewhere in the neghborhood of $750k. And it would have still rented for $3800 (or close to it) back then.

I don't think uneducated landlords are that common -- or at least I didn't until I started reading this blog. Or perhaps I am just a shrewd negotiator (sarcasm).

does this make the landlord necessarily "uneducated" today because he/she has not been able to raise rents commensurate with the change in home prices?

No, rent raises are commensurate with demand not prices -- I have not been able to raise rents either. However, I have 3 properties with a GRM of 25-26. By_palladium's experience is a GRM of 48, which seems to me an aberration.

Instead it's entirely possible that many Marin landlords cannot command more rent because there is not more rental demand for their places.

Exactly. See? We agree on something.

Apr 13, 2006, 9:34:00 PM  
Anonymous rejunkie said...

BTW, market equilibrium could mean esclating rents. IMO, I think we will see a little of both -- a slight decline in prices and a significant rise in rents. The rental market is already tightening (my last vacancy was 14 days, but if you need something more statistically significant, go to realfacts.com) so the "uneducated landlords" should sit tight because improving cash flow is on the horizon.

Apr 13, 2006, 9:37:00 PM  
Blogger sf jack said...

junkie -

Let's say you are an "educated landlord."

One who just said hasn't been able to raise rents since 2001.

In the meantime it's possible, according to you, that by_palladium's place went from $750K to $1.2M in price.

Regardless, whether the rent was originally at $3800 or $2100, what has been the driver of a higher GRM since 2001?

(Hint: Recall, from just above, that rents have not risen since then.)

Answer: It's been attributable to higher house prices.

Not necessarily "uneducated landlords" or "generous landlords."

(Can you imagine - a "collusion" of generous Marin landlords?)

Read below again what I said:

"I think what you are calling the phenomena of 'uneducated landlords' is actually a reflection of house prices being extraordinarily above the historical mean, more than anything else."

And over the next few years:

"Perhaps the 'uneducated landlords' of Marin will become smarter after home prices retreat."

And even more so if they can raise rents because of greater demand! (though we've seen population declining in every town in Marin, except for Novato, in the recent past)

Apr 14, 2006, 9:27:00 AM  
Blogger sf jack said...

junkie -

Earlier you said:

"By_palladium's experience is a GRM of 48, which seems to me an aberration."

An aberration caused by two things.

One, the inability of landlords to raise rent in recent years.

And two, house prices well above the long term trend (mean).

Apr 14, 2006, 9:31:00 AM  
Anonymous Anonymous said...

>>Homes are a manufactured good, and in the long run construction keeps prices down.

But that's only a minor part of housing costs - it's the price of land that is irreplacable. Especially here in northern california.

Apr 15, 2006, 12:34:00 AM  
Anonymous rejunkie said...

sf jack-

I will try this one more time and and then I will give up because either my writing skills are poor or you are failing to get my point.

I have 2 rental properties in Marin, one of which has been continuously rented by the same tenant since 2001. I just sold and bought last year. Using my 3 data points (one sold, one bought and the other one) and current values, I see a consistent GRM of 26. I say that using my 3 data points (and 6 more from my parents investments) ranging in values from $480k to $1.1m (and rents from $1500 to $3200) that by_palladiums' GRM of 48 is an aberration (i.e. an exception, unusual, not typical of the current market).

I therefore posit that stating "it is not a problem to rent a 3/1 house that has a market value of $1.2m for $2100/month" is not consistent with these data and probably not a typical experience of most Marin renters. I am not saying his/her experience isn't true, but that he/she is not in a market-rate rental (hence my comment that Marin is not THAT cheap)

You are saying by_palladium's GRM of 48 is an aberration because landlords cannot raise rents and prices far above the long-term trend. I agree with both of these observations but I too am subject to these conditions and I see a GRM in the mid to high 20s. So, subject to the same market forces, if by_palladium can rent a $1.2m house for $2100, he/she is doing exceptionally ("aberrationally"?)well and should sign as long a lease as humanly possible.

Apr 15, 2006, 4:23:00 PM  
Blogger sf jack said...

junkie -

At this point, perhaps you should consider the possibility that you and your parents could have "uneducated" tenants.

Apr 19, 2006, 10:58:00 AM  

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