The biggest problem with Schiller's model is not accounting for the great number of rich foreigners. Just look at China, for example, with 1.2 billion population. If one accepts that 3% are millionaires, then you have 36 million Chinese who have millions to spend and invest. (To put in perspective, this is approximately 1/4 of the entire US population!) Accordingly, the fallacy of this Schiller's article is not correctly identifying total demand and relying just on US statistics. Once you account for all non-US global millionaires (probably about 50 million), prices are expensive but not unreasonable. Unfortunately, the effect of distributed global wealth returning to few selective cities has changed the paradigm and put many areas out of reach for the locals. Blame it on globalization.
1
Want rational prices? Stop the taxpayer, who ultimately backs mortgages, from accepting 0 to 5% down! Raise it to 20% as it was before the masters of the universe bamboozled the taxpayer into thinking little money down was a great idea.
1
The housing market has been getting dragged upward by the asset bubble in the top of the economy that has been having a distorting effect on which housing gets built, and how much supply exists for property available for resale.
The development market has increasingly been inclined to direct its supply to high asset luxury purchasers. There is more room for profit to developers the top. The price of luxury real estate in cities like New York and San Francisco has skewed the overall averages upwards. Land prices have been driven to a point that they almost require that new housing be directed toward the luxury product. The concentration of capital in new development have restricted the amount of middle and lower class new housing and this in turn has tightened inventories and affected those markets. Rental housing has been subject to restricted inventories that in turn concentrate returns to investors, not renters.
The prices being asked and paid at the top of this luxury bubble does not find support in the commercial amortization model, as such asking prices would require being rented out for several hundred thousand dollars per month in order to preserve their market value. Any strong economic world-wide downturn will have a catastrophic effect on the luxury top of the market. Brick and mortar is much less fungible than cash.
The development market has increasingly been inclined to direct its supply to high asset luxury purchasers. There is more room for profit to developers the top. The price of luxury real estate in cities like New York and San Francisco has skewed the overall averages upwards. Land prices have been driven to a point that they almost require that new housing be directed toward the luxury product. The concentration of capital in new development have restricted the amount of middle and lower class new housing and this in turn has tightened inventories and affected those markets. Rental housing has been subject to restricted inventories that in turn concentrate returns to investors, not renters.
The prices being asked and paid at the top of this luxury bubble does not find support in the commercial amortization model, as such asking prices would require being rented out for several hundred thousand dollars per month in order to preserve their market value. Any strong economic world-wide downturn will have a catastrophic effect on the luxury top of the market. Brick and mortar is much less fungible than cash.
1
If the housing market is more irrational than the stock market because of the difficulty of betting on decreases in home prices, shouldn't the decline in housing prices when the bubble burst in 2008 have been substantially sharper than the decline in stock prices? But comparing the S&P 500 with the Case-Shiller 20 shows a far bigger drop-off in stock prices than in home prices. What is the explanation?
Houses are more illiquid than stocks. You can liquidate a portfolio of $1M worth of shares in a few minutes (unless it is a thinly traded stock), while selling a $1M house or even a $100,000 house takes a few days at the least. So the swings tend to be more dampened in the illiquid market. Plus the stock is a nominal asset - it represents a portion of the company after paying off the obligations, debts, etc... while a house is a fixed asset which has intrinsic value. Finally, a stock on a large exchange can be bought and sold by anyone anywhere, while a house is bought and sold by people from that locality, and in rare cases (less rare now) by funds using investor cash.
2
I bought a house in 2004 and sold it (due to a necessary work-related move) for nearly twice the original purchase price, in early 2006.
I sat on the sidelines while the real estate market was at its peak, concerned a bit about how overpriced everything seemed. But the gains from the prior sale were sitting in savings, each landlord I had ousted me in order to sell their rental property, and I had to have somewhere to live, right?
I put the gains from that sale in another purchase, in early 2007. My agent assured me that I got a good price due to a temporary dip in prices at that time.
Three years later, I owed twice what the condo was worth. After suffering with economic uncertainly for a couple of years, I ultimately had to make the decision to go through the short sale process with that condo.
Here it is, 2015, and I am renting although I could buy. I watched over the past few weeks as dumpy little ranch houses are "renovated" and flipped for a profit. The "renovation" involves a nice new kitchen with granite, wood and tile floors, an updated bath, AC system. In most cases, the potential buyers will overlook more important aspects such as the windows so the flippers leave those alone. They price those flip properties at over twice what they sold for about 18 months ago, yet people seem to be paying those prices. I'm with Warren Buffet - "be fearful when others are greedy..." This feels like a bubble to me.
I sat on the sidelines while the real estate market was at its peak, concerned a bit about how overpriced everything seemed. But the gains from the prior sale were sitting in savings, each landlord I had ousted me in order to sell their rental property, and I had to have somewhere to live, right?
I put the gains from that sale in another purchase, in early 2007. My agent assured me that I got a good price due to a temporary dip in prices at that time.
Three years later, I owed twice what the condo was worth. After suffering with economic uncertainly for a couple of years, I ultimately had to make the decision to go through the short sale process with that condo.
Here it is, 2015, and I am renting although I could buy. I watched over the past few weeks as dumpy little ranch houses are "renovated" and flipped for a profit. The "renovation" involves a nice new kitchen with granite, wood and tile floors, an updated bath, AC system. In most cases, the potential buyers will overlook more important aspects such as the windows so the flippers leave those alone. They price those flip properties at over twice what they sold for about 18 months ago, yet people seem to be paying those prices. I'm with Warren Buffet - "be fearful when others are greedy..." This feels like a bubble to me.
2
the banks should have to hold the loans they make, thats the only way to have stability in mortgages/housing
3
That would mean the death of the 30 year fixed rate mortgage.
I agree with most of the points. However, I think in certain areas, there are factors that limit the supply. For example, SFO and San Jose area, there's simply no more land to build due to regulations etc. One thing you can observe is in the SFO Bay Area, most new buildings are condos/town-homes or town houses. Commuting is easily now 1.5+ hours each way if one is willing to move further and find a single family house. At the same time, this area is also special that there's constantly new work force pouring in.
1
In many areas homes prices have been going up for not reason even though salaries are remaining the same for a long time. Lets see what is going to happen when the inflation start kicking in. http://www.hometarus.com
1
As Dr. Shiller surely knows, housing prices are greatly affected by the price and availability of mortgage money. Housing prices are directly affected by supply and demand, which in turn are affected by mortgage rates and availability.
The vast majority of home buyers live in their houses and finance their purchase. The owner-occupant makes the market and primarily sets prices. These people look primarily at the monthly payment required to own the home. When mortgage rates are low, prices rise. When money is tight, fewer people qualify. Fewer potential buyers lowers demand and prices fall. Anyone can see how these factors have caused both boom and bust in the real estate market over time.
The housing market is very different from stock, bond, or commodity markets. Each property is unique, while every share of a corporation is the same. Real estate, unlike stocks and bonds, is not liquid. It can take months to sell. Transaction costs are very high compared with stocks. So it is no surprise that the real estate market is "irrational" compared to financial assets sold on exchanges.
In a few markets, such as San Francisco and certain parts of New York City, where a large number of extremely wealthy people want to live mortgages are less of a factor. These areas also attract "investors" who are unconcerned with carrying costs and are hoping for a momentum play or simply want to park money. By definition, this is dumb money.
The vast majority of home buyers live in their houses and finance their purchase. The owner-occupant makes the market and primarily sets prices. These people look primarily at the monthly payment required to own the home. When mortgage rates are low, prices rise. When money is tight, fewer people qualify. Fewer potential buyers lowers demand and prices fall. Anyone can see how these factors have caused both boom and bust in the real estate market over time.
The housing market is very different from stock, bond, or commodity markets. Each property is unique, while every share of a corporation is the same. Real estate, unlike stocks and bonds, is not liquid. It can take months to sell. Transaction costs are very high compared with stocks. So it is no surprise that the real estate market is "irrational" compared to financial assets sold on exchanges.
In a few markets, such as San Francisco and certain parts of New York City, where a large number of extremely wealthy people want to live mortgages are less of a factor. These areas also attract "investors" who are unconcerned with carrying costs and are hoping for a momentum play or simply want to park money. By definition, this is dumb money.
2
Although there is no short selling per se in the housing market, it is also true that if one buys a house with borrowed money, and rents it, one can collect a dividend even if that asset falls in value, rather than having to dump it into a market of falling prices.
And as demand for purchasing houses decreases, the demand for renting can often increase, thereby enhancing the earning power and therefore the value of the asset.
So the rent/buy ratio can add a good bit of efficiency to the market, and limit prices from simply being at the mercy of wishful investors.
And as demand for purchasing houses decreases, the demand for renting can often increase, thereby enhancing the earning power and therefore the value of the asset.
So the rent/buy ratio can add a good bit of efficiency to the market, and limit prices from simply being at the mercy of wishful investors.
1
Housing is different in a way not emphasized here. There is demand for housing as in a residence that is actually occupied and becomes a home. Then there is demand for investment, a way to sink loose cash into something with the intent to gain when the value increases and/or rent out at a profit. Part of the housing problem is that builders lured by the cash of the latter are not interested in meeting the demand of the former, actual people who want to make a home. In fact, the second demand, investment is directly counter to the making of a home.
This does not happen in the stock market. A business could be wiped out on account of either and/or both types of demand basis, failing miserably. People will move on to other jobs and other businesses will fill in the space left in the market. Housing is not the same. It is difficult to go out and find another job if there is nowhere to go out from. Nor is there any protection of one's investment as a home from the goings on of those for whom housing is just another game to play and can wait out winning and losing.
Like labor is different, housing is different too. Naked capitalism needs to be held back from these basic necessities of society if for no other reason to protect it from itself. The hands off folks forget that fruit bearing trees produce more and better fruit from judicious pruning, not just of the sucker branches but to ensure the branches are strong enough to support such a motherlode of bounty.
This does not happen in the stock market. A business could be wiped out on account of either and/or both types of demand basis, failing miserably. People will move on to other jobs and other businesses will fill in the space left in the market. Housing is not the same. It is difficult to go out and find another job if there is nowhere to go out from. Nor is there any protection of one's investment as a home from the goings on of those for whom housing is just another game to play and can wait out winning and losing.
Like labor is different, housing is different too. Naked capitalism needs to be held back from these basic necessities of society if for no other reason to protect it from itself. The hands off folks forget that fruit bearing trees produce more and better fruit from judicious pruning, not just of the sucker branches but to ensure the branches are strong enough to support such a motherlode of bounty.
2
Dr. Shiller has made a very fundamental economic mistake. He's confused about what people pay for a house. They do not pay the 'price,' they pay the monthly payment. Houses are bought with mortgages. What matters about the mortgage is the monthly payment. The 'face value' is irrelevant.
Because of this, the housing market becomes not only irrational, but completely insane, as soon as the government starts forcing the value of money - the interest rate - away from that determined by the free market. Dr. Greenspan started that and his successors have made it much worse.
While interest rates have fallen, people's incomes have stayed the same. 30 years of monthly payments at low interest is worth a lot more loan value than when interest is high. Thus housing prices bubbled up just as the price of other capital assets like stocks have. Stocks keep bubbling up and crashing. Gold bubbled up and is now crashing. Housing started to crash in 2006 and the federal reserve pulled out all the stops to blow a bubble so big it would halt housing price declines. They did it - but have left housing valued at about twice what it is worth.
As soon as Dr. Shiller looks at the proper metric - mortgage payments instead of house prices - he'll appreciate the problem and the amount of damage done to the economy by misallocation of resources to build and sell overpriced homes.
Because of this, the housing market becomes not only irrational, but completely insane, as soon as the government starts forcing the value of money - the interest rate - away from that determined by the free market. Dr. Greenspan started that and his successors have made it much worse.
While interest rates have fallen, people's incomes have stayed the same. 30 years of monthly payments at low interest is worth a lot more loan value than when interest is high. Thus housing prices bubbled up just as the price of other capital assets like stocks have. Stocks keep bubbling up and crashing. Gold bubbled up and is now crashing. Housing started to crash in 2006 and the federal reserve pulled out all the stops to blow a bubble so big it would halt housing price declines. They did it - but have left housing valued at about twice what it is worth.
As soon as Dr. Shiller looks at the proper metric - mortgage payments instead of house prices - he'll appreciate the problem and the amount of damage done to the economy by misallocation of resources to build and sell overpriced homes.
2
Actually something like 40 percent of home sales in the United States are cash purchases and don't involve mortgages. As for the remainder, people certainly do have to pay attention to the "price," as well as monthly payments.
8
Robert Shiller has made a very fundamental economic mistake about the housing market. Okay, I'm taking notes...though you really ought to publish this critique in a journal.
The number of cash transactions down here in Southern California lately has pushed many mortgage-based buyers out of the market.
As long as you're spreading your wisdom around, could you go straighten Stephen Hawking out about the whole singularity thing? I've been convinced that Steve had it wrong, but I've never been able to pinpoint what his fundamental mistake was.
The number of cash transactions down here in Southern California lately has pushed many mortgage-based buyers out of the market.
As long as you're spreading your wisdom around, could you go straighten Stephen Hawking out about the whole singularity thing? I've been convinced that Steve had it wrong, but I've never been able to pinpoint what his fundamental mistake was.
5
Two laws make California real estate unusual and lead to increasing property valuations.
Proposition 13 locks in property taxes as a percent of what you paid for the property, even if it was 40 years ago. People who have owned property for a long time have little incentive to sell unlike other parts of the country where people sell to get out from under rising property taxes. If you are paying $1,000 a year property taxes, why sell? If you are paying $10,000, you sell and move as quickly as you can. The percent of San Francisco houses that come to market is a fraction of what you would find in Boston or Chicago.
The other law is that lenders have no recourse in a foreclosure. In the last bubble, people took on property with little money down. If they sold at a higher price they kept the profits. If prices dropped, they walked away. California was the center for foreclosure in the last downturn and lenders throughout the US and abroad lost a fortune. The same cycle happened 15 years earlier. And again, prices are soaring, loans are increasing and lenders have forgotten how badly they were on the hood in the last cycle.
Proposition 13 locks in property taxes as a percent of what you paid for the property, even if it was 40 years ago. People who have owned property for a long time have little incentive to sell unlike other parts of the country where people sell to get out from under rising property taxes. If you are paying $1,000 a year property taxes, why sell? If you are paying $10,000, you sell and move as quickly as you can. The percent of San Francisco houses that come to market is a fraction of what you would find in Boston or Chicago.
The other law is that lenders have no recourse in a foreclosure. In the last bubble, people took on property with little money down. If they sold at a higher price they kept the profits. If prices dropped, they walked away. California was the center for foreclosure in the last downturn and lenders throughout the US and abroad lost a fortune. The same cycle happened 15 years earlier. And again, prices are soaring, loans are increasing and lenders have forgotten how badly they were on the hood in the last cycle.
3
It is perfectly logical to the investors. The higher we raise the rent, the more our own property is worth. So we keep pushing it up. We squeeze more and more money out of people who have not seen a raise in 20 years, and the value of our own property increases accordingly. Now, no one can afford to buy real estate, except for us. What is not logical about that?
1
The biggest problem is that people should not think of their homes as stock."In my day" we had neighborhoods. You bonded with your neighbors and raised your kids in a stable environment. We didn't know the price of a square foot of property. When the mentality of checking the price of your house every week, like you would the stock pages, began to to creep into America's it was the end of stability in that part of our economy. Everyone became a real estate speculator. Grandma who bought her house fifty years ago so that she could give her family a place to live is a new millionaire on paper. What kind of sense dose this make? We have made our neighborhoods transient and impossible for our children to afford a place to live.
3
Was there a math problem here? San Fran respondents said they thought 10 percent a year over the decade. This would equal 10 times 10. Not 10 times 15. A decade is 10 years.
Also if the question is should you buy or rent. You can rent from me if you want to. Ill take your income and invest it for me.
As a CAD Drafter, I can say this. Economics of real estate ruined my career and nearly cost me my house and I am not having kids because I could not feed them. Architects and Builders need bodies in the chairs. They produce waste on purpose to write off things they do not need to. They pay the bottom nearly nothing and the top drives Lambos and live in giant mansions.
The author could ask the HBA or AIA whats up but they would never tell you the truth. Shortages do not just happen, they are planned and engineered. And banks play right along with them and someone should be charged with fraud and manipulation or is it just business???
Also if the question is should you buy or rent. You can rent from me if you want to. Ill take your income and invest it for me.
As a CAD Drafter, I can say this. Economics of real estate ruined my career and nearly cost me my house and I am not having kids because I could not feed them. Architects and Builders need bodies in the chairs. They produce waste on purpose to write off things they do not need to. They pay the bottom nearly nothing and the top drives Lambos and live in giant mansions.
The author could ask the HBA or AIA whats up but they would never tell you the truth. Shortages do not just happen, they are planned and engineered. And banks play right along with them and someone should be charged with fraud and manipulation or is it just business???
1
Compounding interest, not a math error. Or to some; confounding interest.
3
"CAD Drafter" or not, I suggest you tale a few basic courses in mathematics or finance.
You may feel victimized, but if you don't know the difference between multiplication and compound interest, you would have been the same kind of victim 150 years ago.
Maybe even 2,000+ years ago, if you believe in the rice/wheat & chessboard stories. Meanwhile, there's a great bridge in Brooklyn I could sell you...
You may feel victimized, but if you don't know the difference between multiplication and compound interest, you would have been the same kind of victim 150 years ago.
Maybe even 2,000+ years ago, if you believe in the rice/wheat & chessboard stories. Meanwhile, there's a great bridge in Brooklyn I could sell you...
Why is there no discussion on the appraisal system in America? Its a self-reinforcing phenomenon. My neighbors house goes up so mine must automatically and vice-versa.
There should be two parts to the appraisal: the structure itself (considering condition,etc) and the property location. Location would still be a qualitative assessment but those costs would be regional and within reason. This could just be another tool for the banks/government/people to use to ensure the housing market stays within reason.
There should be two parts to the appraisal: the structure itself (considering condition,etc) and the property location. Location would still be a qualitative assessment but those costs would be regional and within reason. This could just be another tool for the banks/government/people to use to ensure the housing market stays within reason.
Appraiser do use the "cost approach" in evaluating properties, among other methods of evaluation, but the cost approach has it's limits. My very solid wood home built in 1964, would cost a fortune to replicate today. And yet from a buyer's perspective the utility is limited as the closets are small, the garage hardly barely accommodates two small cars, etc. Appraisers consider all of these aspects and more. IF appraisals are honest, they reflect the market but do not make the market. They are reporting a phenomenon, not making it happen.
The biggest problem with the efficient markets theory is the fact that there is too much money trying to chase too few otherwise rational investments. 'Irrational exuberance' would be practically impossible if there wasn't so much money waiting to be invested.
2
Once again I find Prof. Shiller off base. With 40% of sales cash; another 30+% with 20-50% down; the rest need excellent credit, reserves, tax returns, job proof, +++ It is hardly a bubble. In fact it is the floor of a New Market.
2
I understand the buying might not a problem at this time, due to low mortgage. How about when rate double (you would agree that the rate is just a little above all time low) some owners decide to retire/move or got layoff or due to illness. It only take a little more than 3 houses of fire sales (high mortgage rate crate high mortgage payment) to bring down the whole market. Property taxes for a $1.5 million is a lot, and how much can one save a month from a $10,000 salary, about $1,000. There is not enough saving to get through the tough time. What is the difference between now and 2008? There is few, there are more job and with better income. 2008, people lie about their income plus fraud created bubble but the rate was not as low as today. This time is low interest rate with bubble from social network stocks. Fed is telling lenders, the short-term rate will go up slowly, but important for lenders to remember if you lend homeowner 4% for 15-30 years, you will lose money. This year mark the ceiling not floor of real-estate market.
1
The bank makes money at 4%. They do not care that you are not good at managing cash flow. 10K a month and you can`t make it work out. I am so sorry. Houses do not pay dividends. Its true. Maybe get a 5K house and put the other million in the bank???
The way you short the real estate market is to sell your house. How hard is that to understand?
3
If prices keep going up you haven't 'shorted' - only gotten out of the market
1
That's not shorting, that's being out of the market. A big difference. Shorting means that you sell something that you don't own, but promise to deliver it back some day to the actual owner.
2
@Aly. His point was a rebuttal of the article statement that shorting in real estate doesn't exist. It does. The bet is simply against the market just like in stocks. It might go down it might not.
It isn't rational simply as an investment, because housing isn't just an investment.
It took me decades to learn that lesson.
The Pacific Heights neighborhood I live in in San Francisco is just a dot in a jewel of a city.
I have lived and traveled all over the world, but would not trade my dot for any amount of monies.
I will never sell, for I have never seen anything better. It is not a speculation, but a calculation.
I am an expert at cash flow analysis and the net present value price of infinity discounted over whatever timeline is still infinity.
It took me decades to learn that lesson.
The Pacific Heights neighborhood I live in in San Francisco is just a dot in a jewel of a city.
I have lived and traveled all over the world, but would not trade my dot for any amount of monies.
I will never sell, for I have never seen anything better. It is not a speculation, but a calculation.
I am an expert at cash flow analysis and the net present value price of infinity discounted over whatever timeline is still infinity.
7
Excellent response. What does it mean? My home is up to 230k from 170k. Its 15 years old. There is a new neighborhood across the street with homes starting at 200k.
Should I sell now and go buy one across the street? Ive paid off 70k of the original mortgage. So, id have 70K plus difference in increase value of 60K = 130K making my new home value at 200K today, and a mortgage payment of the difference = 70K.
Wouldn`t that make my cash flow awesome? I could go travel or work less or buy a nice car or or or.
I think we will come to a place where you say San Fran is out of room and there is nothing new across the street? Im saying book earnings adn buy what you need, right?
Should I sell now and go buy one across the street? Ive paid off 70k of the original mortgage. So, id have 70K plus difference in increase value of 60K = 130K making my new home value at 200K today, and a mortgage payment of the difference = 70K.
Wouldn`t that make my cash flow awesome? I could go travel or work less or buy a nice car or or or.
I think we will come to a place where you say San Fran is out of room and there is nothing new across the street? Im saying book earnings adn buy what you need, right?
Well you probably are able to get a HELOC and save the sales commissions and moving costs if you only want the cash.
I'm saying your home is idiosyncratic.
Real estate moves up together and down together.
Selling an appreciated asset, paying transaction fees and possibly paying taxes on capital gains after deductions, just to buy another inflated asset for speculative purposes misses the point that your home is an asset they pays qualitative dividends that should not be ignored.
Focus on your quality of life.
A house is only a good investment because it helps one to save.
But it can be a great investment if one loves the house, neighbors and neighborhood in which you reside.
I'm saying your home is idiosyncratic.
Real estate moves up together and down together.
Selling an appreciated asset, paying transaction fees and possibly paying taxes on capital gains after deductions, just to buy another inflated asset for speculative purposes misses the point that your home is an asset they pays qualitative dividends that should not be ignored.
Focus on your quality of life.
A house is only a good investment because it helps one to save.
But it can be a great investment if one loves the house, neighbors and neighborhood in which you reside.
1
First principle: a home is a home, not an investment.
8
Why is the story of the huge and once in a millenial event of Chinese buying second houses in Vancouver, San Francisco, Sydney, London, New York and Miami barely reported in the media?
Is it fear of being called racist? If so that is absurd.
This enormous capital flight from China, the enormous cultural shift it brings, the transformation of the nicest cities into gangster real estate banks, all goes barely mentioned.
Is it fear of being called racist? If so that is absurd.
This enormous capital flight from China, the enormous cultural shift it brings, the transformation of the nicest cities into gangster real estate banks, all goes barely mentioned.
7
Shiller's view is welcome, perhaps, to those looking to buy a home, but how can the advice help them? This new bubble has proceeded to "gobble-up" the housing of low-income individuals and homes that are not built dense enough to maximize the benefit to local tax digests. This financial terraplanning is not about providing housing people want or need, but housing that pays off for local legislative bodies, realtors and lenders. And, as always, the fat cats are scolded and allowed to slink off with their riches while leaving the average Joe's to pay the tab and negotiate the ruins of another bust.
6
Dr. Shiller and Readers: The two central points of this analysis that the housing market: 1) lacks short-sellers and as a result is subject to major overvaluations or "bubbles" and 2) investors often underestimate the responsiveness of the supply curve in the housing market to changes in demand, and the timeliness of this supply response, are well-taken. Regarding the second point, Paul Krugman, an economic analyst for the Times splits the housing market into two regions which differ in their inherent ability to respond to shifts in demand in the housing market. He dubs as "Flatland," regions with "a lot of empty space" to expand into. Dr. Krugman cites Atlanta and Houston as examples of such urban areas with limited "bubble" potential; or very responsive supply curves. In contrast, he dubs as "Zoned Zones," regions with tight zoning restrictions or perhaps geographical barriers to further physical expansion. As a result of these restrictions on supply, significant "bubble" potential underlays such markets. Also, on a related matter, Gretchen Morgenson, a Times' financial analyst, discusses a new IRS ruling on REITs which may broaden the classes of physical assets qualifying for advantageous REIT treatment. "Electric utilities, cable operators, and other telecoms" may be able to form REITs and glean the tax savings, she writes in her column of 8/10/2014, citing the tax expert, Robert Willens of The Willens Report. [7/27/2015 M 1:57 p.m.]
7
Very briefly, Dr. Krugman cites New York City and Miami as examples of "Zoned Zones." [7/27/2015 M 4:29 p.m.]
2
Perhaps I am missing the point, but I thought the worst bubbles were in places like Ft. Myers, Fla., Las Vegas and various exurban locales. NYC was comparatively unscathed. I don't know about other places.
1
JG: Perhaps I can be a little clearer. Dr. Shiller basically argues that the supply curve for housing is very responsive to shifts in the demand curve for housing, I think. In other words, when the demand curve for housing shifts significantly to the right, meaning that after this shift, at every housing price there is a greater quantity of housing demanded. Surprisingly, the supply curve adapts to this shift in demand with its own rightward shift, apace. Also, this housing supply curve is elastic or fairly flat, meaning there are not large price breaks, or steep vertical segments, in it. Thus, because of this supply responsiveness to shifts in the demand curve, volatile price movements in the housing market occur infrequently. Refining this thesis: I think Dr. Krugman's "Flatland" designation refers to urban areas with few physical or regulatory restrictions on building outward in the suburbs. Thus, with fewer restrictions, the housing supply can expand with relative ease by simply building outward from its urban base with few market barriers limiting land access. Whereas "Zoned Zone" markets occur in regions with physical or regulatory barriers limiting the supply increases. For examples, the island environments of Manhattan and San Francisco severely restrict available land; while Las Vegas has a water resource problem, a la Dr. Krugman. With this restricted supply, these last three urban regions would evidence more price volatility and "bubble" vulnerability. 7/29 1:31p
In a knowledge economy, educated people are the ultimate resource. Investors realize this, and are raising housing and educational costs world wide as a way to extract value from the process of birthing and training new workers. As various European economies crumble ultimately because of low birth rates, and Japan limps along as well, future analysts will be stunned that more people were not up in arms about the stratospheric rise in the cost of housing and education. These are the two main tools by which moneyed interests capture the wealth of a knowledge economy. The irony is that telecommuting and self-learning have never been easier because of the internet. So for all those forking over earnings to live in desirable locations, or those paying gobs of money for the best education that money can buy, please realize that it is in your power to change how you live and improve your life outcomes. You just may not have the life you dreamed of, but that life was a trap anyways.
12
I would pay to see any market that is behaving 'rationally' these days. Perhaps we have entered a new era where high volatility is the new norm. if so, what are we to do about it? http://forwardeconomics.net/2015/07/26/circular-economy-society/
4
We must accept the truth globalization has created a mess. Rather than having people exploiting their fellow citizens or the poor folks leaving their countries for opportunities elsewhere why don't all western countries close their doors and let the people work out their problems at home; if it like my family many generations ago we came to a basically uninhabited country and yes there were wars with indians but we didn't arrive expecting to get a free lunch like people do today in San Francisco the Chinese are given brochures instructing them how to take advantage of services provided, what would I get if I went to China or Mexico? Enough is enough.
2
Population growth is exponential. Chinese people are human beings too. Globalization is not going to stop. Maybe move to Mexico? India? The real deal is that the borders are lines drawn on a map but the earth is a giant sphere that spins around on its axis around the sun. And life is too short to fight against other humans.
I would argue that San Francisco is a very special case indeed, because not just the city but the entire peninsula and the East Bay as well are fully built out. As commenter Richard points out, the only alternative is a very, very long commute. Barring another crash, the San Franciscans who expect 10% per annum increases in their home evaluations are probably not far off.
3
Crash ... as in a 8.0 earthquake?
Prices would drop in the short run, I predict.
Prices would drop in the short run, I predict.
I live in the SF Bay Area and can tell you that there are in fact plenty of spaces where you can build in the East Bay and the city itself. I can think of at least five empty lots within a 10-minute drive of where I live.
Wow, I was truly amazed when I looked at the byline to find out who was writing this totally-out-of-touch-with-reality analysis of the housing market and found it was Robert Shiller.
Hi analysis shows exactly why the EMH (efficient markets hypothesis) so often apparently fails to apply in the housing market. The facts are known to everyone, but are commonly looked at in such a myopic or one-sided way that lenders don’t stop lending even when loans are bad, and buyers don’t stop buying when prices have topped out.
The housing market now is driven entirely by foreign buying and private equity, with some more affluent domestic buyers and desperate families drawn in by the momentum. There is no overhead resistance on prices, because workers and families priced out of ownership have to rent. If they can’t afford one or two to a housing unit, they double or triple up. So Blackrock can buy 1 in 10 houses in Tacoma, for example, thus achieving monopoly pricing power in rental housing there, driving purchase prices out of reach of families, and then monetizing their income (via rent) as a security for the one percent.
Hi analysis shows exactly why the EMH (efficient markets hypothesis) so often apparently fails to apply in the housing market. The facts are known to everyone, but are commonly looked at in such a myopic or one-sided way that lenders don’t stop lending even when loans are bad, and buyers don’t stop buying when prices have topped out.
The housing market now is driven entirely by foreign buying and private equity, with some more affluent domestic buyers and desperate families drawn in by the momentum. There is no overhead resistance on prices, because workers and families priced out of ownership have to rent. If they can’t afford one or two to a housing unit, they double or triple up. So Blackrock can buy 1 in 10 houses in Tacoma, for example, thus achieving monopoly pricing power in rental housing there, driving purchase prices out of reach of families, and then monetizing their income (via rent) as a security for the one percent.
17
In san Francisco there is no empty land to build more supply. Also across the Pacific there are 2 billion people wanting to move to SF.
6
People in the SF Bay Area love to say "there is no empty land to build more supply," but that's simply not accurate. There is plenty of room to build more housing and more dense housing. See the essay by Palo Alto Forward titled "Where Can Palo Alto Add New Homes?" that addresses this very point. Consider that if you replace a 1 or 2 story building with a small Floor Area Ratio (i.e., a lot of empty land on its lot) with a 4-6 story building with a higher FAR, you can add a hundred housing units. If we started supporting a car-free lifestyle in more places than the couple of large cities, then we could waste less land on parking spaces.
5
What a howl! First of all, there is empty land, for example the 880 acres in southern Fremont which is about to be developed as the Warm Springs Innovation District. It is true that filling such empty land with 4-6 story houses will no solve the housing crisis here, but if you removed the development restrictions in places like Foster City, Mountain View, etc., that prevent the development of such urban housing, then for sure you could build enough in 5 or 10 years to have an adequate supply. The density here is extremely low, and you could easily multiply the housing stocks by 20x if you were going to allow New York densities. This is a fig leaf NIMBY Bay Area residents use to justify the real ideology here, which is to enrich the owners and those who have been here longer at the expense of all new arrivals.
Of course there is no amount of housing construction which will solve the crisis if all the new inventory is purchased by cash investors from countries with very large populations who now own many more square feet of real estate than exists here, which worth as much or more per square foot than real estate here, who have no ceiling on what they are willing to pay, and are wealthy enough to buy new construction and hold it off the market as extra homes, or mom and kid school pads, or whatever.
Of course there is no amount of housing construction which will solve the crisis if all the new inventory is purchased by cash investors from countries with very large populations who now own many more square feet of real estate than exists here, which worth as much or more per square foot than real estate here, who have no ceiling on what they are willing to pay, and are wealthy enough to buy new construction and hold it off the market as extra homes, or mom and kid school pads, or whatever.
1
Location, location, location.. stands above any financial derivate or index to future housing prices..
2
Right, i followed Dr Shiller and still own a share of SRS. I should've made a bundle when housing collapsed, but SRS did also. Guess what, in Orange County people keep procreating but zoning and things and now the drought, mean we're not building more houses. I finally bought one after my rent went up again last year. Shoulda done it 20 years ago huh? Plenty of free parking in my garage and driveway. Park around the corner with tennis courts, etc. Quit thinking about it and buy a place if you can. Scarlett O'Hara was 100% correct.
1
So how should the smart money view a cheese box apartment in Manhattan with a glorious view of a neighboring brick wall and a noisy train overpass that has an asking price of $800,000 to $1 million?
5
SF cannot compare to NY. NY is not consider expensive yet because the average income is much higher, with huge bonus. However; if stock market went south, layoff starts and there is no income to support the mortgage payment. I think it will be corrected too.
You clearly don't live in NY.
Most people here do not work for the stock market--thus, no bonus.
Most people here do not work for the stock market--thus, no bonus.
Clearly the RE market is not "efficient," in an ideal sense or in a practical, real, sense. One aspect of this is the lack of short selling, as noted. but I do not think the author says lack of short selling is the only reason the market is inefficient.
And it is true that many factors impact the RE market, which is a supply and demand market of a real, physical, asset, one that is exceedingly difficult to transport. Hence the emphasis on "location..."
And it is true that in SF recent changes in the economy have increased prices greatly. The alternative is to live far away and drive to work, and back home, for several hours every day, a complete waste of time and energy, in every sense. It is a complicated, imperfect market.
But it makes sense to think about it, in detail, and to consider the "market" aspects of what is going on. The comical aspect is that the charm of many locations is lost when the existing residents (and many businesses) move away due to the high prices or high rents. Soon prices for needed goods and services rise and conspire to reduce the apparent value of the income received by the various new residents.
No, the housing market isn't rational, from the perspective of the consumers, but is rational in the long term and in the broader sense. As for denying foreigners the ability to buy over-priced real estate, that seems like denying gays the great joy of marriage. There is no reason they should not suffer like the rest of us when things go wrong.
And it is true that many factors impact the RE market, which is a supply and demand market of a real, physical, asset, one that is exceedingly difficult to transport. Hence the emphasis on "location..."
And it is true that in SF recent changes in the economy have increased prices greatly. The alternative is to live far away and drive to work, and back home, for several hours every day, a complete waste of time and energy, in every sense. It is a complicated, imperfect market.
But it makes sense to think about it, in detail, and to consider the "market" aspects of what is going on. The comical aspect is that the charm of many locations is lost when the existing residents (and many businesses) move away due to the high prices or high rents. Soon prices for needed goods and services rise and conspire to reduce the apparent value of the income received by the various new residents.
No, the housing market isn't rational, from the perspective of the consumers, but is rational in the long term and in the broader sense. As for denying foreigners the ability to buy over-priced real estate, that seems like denying gays the great joy of marriage. There is no reason they should not suffer like the rest of us when things go wrong.
1
A sharemarket that has peaked and crashed twice in the last 20 years, and is now 3 times what it was 7 years ago might not be the best example of an efficient market. The problem is that if everyone is fooled then there will be some massive bubbles. There is an optimistic streak in almost everyone that believes that there is a free lunch, and all you have to do is get into an investment that rose 10% last year and you will make 10% next year.
In Australia, it was irrational that after our car industry was announced to be shutting down, the real estate in one of the major car-building cities was still appreciating. Obviously they've never heard of Detroit.
In Australia, it was irrational that after our car industry was announced to be shutting down, the real estate in one of the major car-building cities was still appreciating. Obviously they've never heard of Detroit.
2
It is a real reality check for me to realize that in 95% of the US housing market people just buy a house for a simple reason: to live in as an alternative to renting. With the help of various real estate apps, I see the house my parents lived in the east coast when I was born has barely appreciated past the CPI. I myself bought rental property back in '08 and made over $1M in equity (which obviously just exists on paper) plus have several tech workers paying me over $3K per month just to live in a functionally obsolete home that happens to be a short distance from a very famous tech company. Although I am definitely a beneficiary of this irrational exuberance, my money is locked up and I do not want to sell. I feel sorry for people who cannot even come close to buying a home, but that is the boom and bust gold rush mentality California is known for.
4
The percent of the country where buying is not an alternative to renting continues to increase dramatically, and by design. Firms like Blackrock have seen what has been going on for decades in Silicon Valley, where NIMBT ecologically motivated anti-development fervor has thwarted new development, and are buying huge swaths of the West Coast (Portland, LA, Seattle, and San Francisco), and then charging ever higher rents after reducing the supply so workers and families are priced out of housing. If you sold your own home or your rental property, however, the buyers almost certainly be cash buyers from abroad. That is the new element here. The housing market in the Bay Area would never have recovered without the foreign buying, because the tech workers making $150K can still barely afford their rent, and certainly can't save $200K for a down payment on a place with a $6K per month mortgage.
4
Housing is unnaturally inflated by our tax code - there is no logic to a mortgage interest deduction that only benefits realtors. Now that fewer stagnant wage earners can afford a home, mortgage interest deductions look like capital gain tax rates, i.e., a boon for the rich, not the economy. The author is in pointing out 'sticky' housing prices. The best way to 'mark to market' real estate is to remove the interest deduction.
10
You are correct. But those changes to the tax code were a one trick pony. Unless there are continuous changes to the tax code to prop the market higher and higher, there's no reason for the market to beat the inflation rate after normalizing for population size.
For the common man a house is something that just keeps the rain off your head. No need to be speculating about cashing in at sometime unless you plan on living in a tent by the river and living off the cash. For me, I am in the rental business and when I retire from my work/work, the rentals are my retirement. As for speculation, yes we have the Russians coming in with suitcases full of cash and buying property sight unseen. Same with the cartel money, they have to launder it somehow and real estate is a good way to invest their profits. As for the Realtors and REO will its changed for the worse; it used to be a profession, now for many its a hobby or a past time. Hard to find a true Pro, many just list on the MLS, do open houses and thats it! When the housing bubble burst they conned the banks into giving them the REO homes to sell and that was a disaster. I used to be able to go into any bank and look at their REO listing and work a deal with the bank on the spot. Go ahead and try that now! The tax structure may incentives people into buying homes but that savings is for slouches. The majority of people should be renting, the homes I look at have had poor maintenance or none whatsoever because the people that bought them should never have been allowed to purchase it in the first place. They buy the home can barely make payments and property tax and all maintenance and upkeep is abandoned. Anyhow interesting article, but whats the point.
2
I'm not sure what the here message is. If it is simply, think of your home as a place to live not an investment then that's good. People should buy houses instead of renting if the numbers work and they plan to stay in one place for a number of years. Additionally, for most people tax incentives sweeten the deal for home owners. Also even if homes aren't a great investment buying one and paying off a mortgage is forced savings of a sort. If people who weren't home owners were diligent about putting equal amounts in their retirement accounts it would be just as good but few people are that disciplined. But as long as one has the basic understanding that a house can lose value the fact that the market isn't perfectly efficient should have no input into the decision on whether to buy or rent.
1
It's fine and well to say that new housing will be built to accommodate demand, and this is true is many places. However in select areas, particularly places like the SF Bay Area, Manhattan, etc., there is simply no easy or inexpensive way to increase the housing stock in those particular areas. Yes, you can build further and further out, but those outlying increases of housing stock will not affect the price of homes in the desirable areas which is increasing in part (mostly?) because there is limited capacity to build more housing. Usually building more means tearing down existing low-rise properties and building high-rise properties. There is also a significant time-lag in these areas because new projects have a long zoning/permitting process to navigate, making such projects riskier and more expensive to execute, leading to higher prices for the resulting units. The author's remarks make complete sense for places that have excess land on which to build, but not so much where land is a scarce/expensive commodity.
7
For sure, the forces thwarting new construction in the Bay Area and similar places will not overcome by the kind of incentives Shiller describes, as you suggest. If you can make money from your housing appreciating, then why allow new construction? If you can effectively thwart it using the political process, and your own real estate becomes more valuable than it would if there was adequate housing, is this not a preferable alternative? Even better, imagine that your real estate could be worth more than the average job holder could afford, even in a place with high pay like Silicon Valley, thanks to a bottomless supply of super affluent cash buyers from abroad? Entire generations of early arrivals have garnished the income of most of those working in the technology field by monetizing their real estate in this way, and now they are earning even more by selling to tourist visa immigrants. It is wrong to suggest that it has anything to do with a lack of room to develop, however, the "scarcity of land" has been engineering by NIMBY owners and residents for their own benefit. You could fit two Manhattans in San Jose alone if you wanted to.
1
"The housing market isn't rational." No, really??
3
This and the stock market is why the Feds MUST raise interest rates.
They have replaced their role as stabilizer with destabilizer of the broader economy. Extreme booms and busts are terrible particularly with each bust bailed out by the middle class and each boom exploited by the kleptocapitalist class.
They have replaced their role as stabilizer with destabilizer of the broader economy. Extreme booms and busts are terrible particularly with each bust bailed out by the middle class and each boom exploited by the kleptocapitalist class.
13
The fed didnt cause the last housing bust. This is well documented elsewhere. The fed does not control all the interest rates. They control the short term over night lending rate i.e. the federal funds rate. Future rates are the expected value of shorter term spot rates essentially. The fed does not control this it is set by the market.
1
The professor is right: our here in the West Coast, especially in the SF Bay Area, homes are selling for crazy prices again. In the working class neighborhood I'm from and continue live in, you never heard of decent but not stellar craftsman bungalows going for low millions. Yet, that's happening. Or, townhomes starting at $700K. Maybe this is not that big of a deal in other Bay Area cities, like SF, and the many cities in and around Silicon Valley. But, based on historic comparisons, even in my working class neighborhood prices are just crazy. But I think so loooong as current homeowners are **not** taking money out of their houses like they did pre-2008, or so long as new buyers are **not** re-doing the zero-down shenaningans, should we really worry about these crazy prices? It is what it is. Now, what's happening in the Bay Area rental market (crazy too) is another matter altogether, worthy of deep consideration by professors and pols.
1
The prices in Silicon Valley are being driven by Chinese, Indian, Japanese, Korean, and other families who are relocating to the US for the schools. In my neighborhood (Fremont) the flyers say the realtors will promote your listing in “100 different countries and 19 different languages”. They are buying the school districts and drive the prices higher and higher. School districts in the most affordable parts of Silicon Valley are 95% Asian, I am living there and married to an Asian, and they are buying everything that comes on the market at 15% over asking, for cash, and have been since 2008. My broker says they have been 25-50% of the market for the last 7 years. Their real estate is worth more than ours, so they can sell there and buy here.
So Schiller’s view disproves the efficient market’s hypothesis by showing that even a top expert can’t figure out that you would have to build enough new housing for everyone to move from China, India, and Japan, and then maybe prices will moderate. The real estate markets aren’t efficient because even the experts are so often clueless about what is going on in them.
So Schiller’s view disproves the efficient market’s hypothesis by showing that even a top expert can’t figure out that you would have to build enough new housing for everyone to move from China, India, and Japan, and then maybe prices will moderate. The real estate markets aren’t efficient because even the experts are so often clueless about what is going on in them.
1
That's interesting. I hope NYT or the Chron analyzes your point, to find out if it is a myth or true. Americans shouldn't suffer because folks are fleeing Asia. Hopefully Republican presidential types will look into this too. Trump?
There have been 2 or 3 NY Times articles on this trend, and hundreds more are easily found by searching. For example:
http://www.nytimes.com/2015/02/08/realestate/wealthy-chinese-buyers-head...
What is kind of weird is that in San Francisco, there is red hot anger at the tech workers among the displaced, which is strange because all the tech workers have to rent, and probably can't save much past their rent, and it is really the long-time resident owners who are earning the $. Most of the displacements happen through condo conversion, so it is really these foreign purchases that are reducing rental stock and driving prices higher.
But among the American-born urban hipster and tech worker population, there is no consciousness about what is going on with foreign investment. Most of these types have stabilized rent, so they are either protected from these trends or evicted through the Ellis Act. Amongst the working permanent residents who came from abroad, however, they are well aware, because they cannot stay houses as the are evicted from rental units which are sold, and are priced out of purchasing houses, which are for the most part too expensive to buy with a job.
Of course, a lot of the residents in these areas are not American citizens, but permanent residents who are the lifeblood of the US tech industry, which thrives only because it is the one that is most open to the most skilled people from every other country.
http://www.nytimes.com/2015/02/08/realestate/wealthy-chinese-buyers-head...
What is kind of weird is that in San Francisco, there is red hot anger at the tech workers among the displaced, which is strange because all the tech workers have to rent, and probably can't save much past their rent, and it is really the long-time resident owners who are earning the $. Most of the displacements happen through condo conversion, so it is really these foreign purchases that are reducing rental stock and driving prices higher.
But among the American-born urban hipster and tech worker population, there is no consciousness about what is going on with foreign investment. Most of these types have stabilized rent, so they are either protected from these trends or evicted through the Ellis Act. Amongst the working permanent residents who came from abroad, however, they are well aware, because they cannot stay houses as the are evicted from rental units which are sold, and are priced out of purchasing houses, which are for the most part too expensive to buy with a job.
Of course, a lot of the residents in these areas are not American citizens, but permanent residents who are the lifeblood of the US tech industry, which thrives only because it is the one that is most open to the most skilled people from every other country.
1
House buying decisions are, however rational, are driven by reasons that are hidden from reason itself. Some buy to keep their wealth from prying eyes; some to show off; some hope to make a quick buck; some to hide their ill-gotten gains; some out of necessity; some buy a safe harbor from political turmoil; many do so on easy credit--hoping to make a killing. Professor Schiller might test his EMT against the real estate bubbles that have been expanding in London, Hong Kong, New York, Singapore, etc. to see whether the theory has both predictive and post-dictive powers. If not, the theory may need major retooling.
I think this article gives us a lot to think about. Real estate prices have risen 27 percent since 2012. While many investors are trying to purchase homes before interest rates rise, the housing market is not rational enough to determine what the best time to purchase is. With the stock market we can hedge our bets for a downturn in the market, but with real estate you need to be in for the long term. Our real estate markets are geared towards investors who are looking to purchase a home as a long term investment. Once we have too many builders constructing new homes it causes a big supply and the housing prices will drop.
I liked this article because it helped me learn more about the housing market. I have heard about supply and demand in marketplaces but this article suggests that supply and demand may not be the sole things that dictate the housing market. I found it interesting that when the Shiller National Home Price Index fell 6 percent, the S&P 500 Residential REIT index tripled in value. This is clear evidence that you are not able to protect your housing interests in the market. If you believe the market will decrease you could be correct but the REIT index you purchase may not follow the way the housing markets are reacting. Housing prices have been increasing since 2012. It will be interesting to see if the market corrects itself. I hope to be able to learn more about the housing market in future years.
I liked this article because it helped me learn more about the housing market. I have heard about supply and demand in marketplaces but this article suggests that supply and demand may not be the sole things that dictate the housing market. I found it interesting that when the Shiller National Home Price Index fell 6 percent, the S&P 500 Residential REIT index tripled in value. This is clear evidence that you are not able to protect your housing interests in the market. If you believe the market will decrease you could be correct but the REIT index you purchase may not follow the way the housing markets are reacting. Housing prices have been increasing since 2012. It will be interesting to see if the market corrects itself. I hope to be able to learn more about the housing market in future years.
(1) Short selling in the stock market did NOT prevent the TMT Bubble from forming. Short selling in the mortgage debt market did not prevent the massive subprime market to grow beyond all reason. Short selling does NOT prevent bubbles in markets.
(2) Stocks/bonds are made up pieces of paper. They are invented out of thin air. Houses are not like that. They are PHYSICAL products. It takes time for a market response and there are places in the country where it is NOT possible to build more homes.
(3) There is a THIRD OPTION that Shiller (and all of the politicians that support our federal tax subsidies for housing) never mentions when prices skyrocket: DEMAND just crashes (or the demand just MOVES AWAY). It is quite apparent given the VOLUME (and not just prices) that people are moving in large numbers to other parts of the country where the prices are more reasonable.
(4) The markets in the coastal cities are being driven by things other than demand for a place to live: in NYC, it's Wall Street incomes. In SF, it is driven by the IPO and private startup economy. In DC, it is driven by the dramatic expansion of highly paid lobbyists. The real estate market prices reflect nothing more than the bubbles in these forms of personal income. In all three, there are elements of foreign buyers coming in and trying to hide income/assets from either legal or tax authorities in other countries.
A bubble is when people are paying prices that do not reflect long-term, underlying value.
(2) Stocks/bonds are made up pieces of paper. They are invented out of thin air. Houses are not like that. They are PHYSICAL products. It takes time for a market response and there are places in the country where it is NOT possible to build more homes.
(3) There is a THIRD OPTION that Shiller (and all of the politicians that support our federal tax subsidies for housing) never mentions when prices skyrocket: DEMAND just crashes (or the demand just MOVES AWAY). It is quite apparent given the VOLUME (and not just prices) that people are moving in large numbers to other parts of the country where the prices are more reasonable.
(4) The markets in the coastal cities are being driven by things other than demand for a place to live: in NYC, it's Wall Street incomes. In SF, it is driven by the IPO and private startup economy. In DC, it is driven by the dramatic expansion of highly paid lobbyists. The real estate market prices reflect nothing more than the bubbles in these forms of personal income. In all three, there are elements of foreign buyers coming in and trying to hide income/assets from either legal or tax authorities in other countries.
A bubble is when people are paying prices that do not reflect long-term, underlying value.
1
"...in January showed that national home price expectations are modest: on average increases of only 3.7 percent a year are expected for the next 10 years."
When the housing bubble collapsed, I read somewhere - likely here or a WaPo - that for the 50 YEARS prior to the bubble, housing had appreciated an average of 3 % per year.
So, obviously people have still not been educated enough about what is a reasonable, rational price and appreciation for housing.
Are they are too greedy for their own good.
Or, like Alan Greenspan, do they think the price will always go up?
Do you think some kind of truth in lending, such as having to provide actual information on the material and labor costs involved in building a house would be of any benefit in smartening people up?
When the housing bubble collapsed, I read somewhere - likely here or a WaPo - that for the 50 YEARS prior to the bubble, housing had appreciated an average of 3 % per year.
So, obviously people have still not been educated enough about what is a reasonable, rational price and appreciation for housing.
Are they are too greedy for their own good.
Or, like Alan Greenspan, do they think the price will always go up?
Do you think some kind of truth in lending, such as having to provide actual information on the material and labor costs involved in building a house would be of any benefit in smartening people up?
I will shares some facts for consideration.
1. 2003-2007 housing bubble has a lot to do with lack of income verification, stated income (lies) for loan application.
2. after bubble, bring fed rate to zero didn't work, QE was designed to lower loan term rate, so mortgage rate is all time low, crate bubble.
3. Asia market is irrational, huge down payment and low rate (as low as 1-3%) create a even bigger bubble. Compare with their real estate, US is very cheap so, they bring their cash to US. Bring bubble here.
4. None of that is in the history book. In order to face a problem that we never encountered, we cannot use text book solution.
5. Use logic, if the mortgage rate went up to 8% (long-term rate), your mortgage payment will double with the same purchase price, unless you put more cash in. Income cannot catch that. Companies cannot afford to give their employee 100% raise, they will move out and bring their employee to other location.
6. Compare with 0.25%, real estate does produce better return, but how about rate go higher?
All this will take a long time. But I would not know if the housing price will be efficient, new rabbit out of hat. And, if you are been logical, you will be like me, has money to buy but afraid to loss 40% and deal with endless struggle of mortgage payment take up 40% of your income. I don't mind if I don't make a penny from it or even lost 5-10%%, but 30-40% is hard to swallow. Sorry for me 2nd rated writing.
1. 2003-2007 housing bubble has a lot to do with lack of income verification, stated income (lies) for loan application.
2. after bubble, bring fed rate to zero didn't work, QE was designed to lower loan term rate, so mortgage rate is all time low, crate bubble.
3. Asia market is irrational, huge down payment and low rate (as low as 1-3%) create a even bigger bubble. Compare with their real estate, US is very cheap so, they bring their cash to US. Bring bubble here.
4. None of that is in the history book. In order to face a problem that we never encountered, we cannot use text book solution.
5. Use logic, if the mortgage rate went up to 8% (long-term rate), your mortgage payment will double with the same purchase price, unless you put more cash in. Income cannot catch that. Companies cannot afford to give their employee 100% raise, they will move out and bring their employee to other location.
6. Compare with 0.25%, real estate does produce better return, but how about rate go higher?
All this will take a long time. But I would not know if the housing price will be efficient, new rabbit out of hat. And, if you are been logical, you will be like me, has money to buy but afraid to loss 40% and deal with endless struggle of mortgage payment take up 40% of your income. I don't mind if I don't make a penny from it or even lost 5-10%%, but 30-40% is hard to swallow. Sorry for me 2nd rated writing.
3
I also has a solution for foreign ownership. Real estate is consider a investment because very low property tax in Asia. So, many Asian own real-estate doesn't have problem even the property doesn't rent out. That is wrong because property tax is necessary and it is used for many purpose. If you raise the property tax to 3%, there will be less return for single house investment. At the same time, government can reduce sales tax and income taxes to compensate those local residence and local income earners. Foreign ownership intended for investment, would not produce return to justify. For a person earn $1 million a year, his sales taxes is about the same as who earn $50,000, and foreigner ownership don't pay much sales taxes and income taxes to begin with. Good way to control housing price. In reality middle class doesn't own much of properties. The income taxes and sales tax reduction will offset the raise of property taxes. Rent payment truly reflect the income around the neighborhood. It is impossible to raise up if average income is not enough to support it. Why is Asia's property tax so low? Corruption!
Simple solution: ban foreign real estate purchases of existing real estate like they did in Australia. Every H1B Asian I know working for a tech company in Silicon Valley (including my wife) is howling for someone to do this before we are driven out of our housing by 1%er rich new arrivals from Asia.
1
US is a wonderful country of freedom. To ban foreign real estate purchase and what is next? Ban stock purchase? No it has to be fair to all people, US is not China, we cannot do that. China/Asia real-estate bubble will bust because they need the property taxes to support their social/school spending. As soon as the property taxes reach 1 to 2%, the bubble will bust.
Over long period of time, the household income is still a very good way of valuate housing price. Can a job interviewer accept a job ($10,000 a month) at SF knowing $6000 rent or $7000 mortgage? Just be patient, when rate goes higher, all this bubble will bust. It might take a long-time for mortgage rate to go to 6-8%, but it will be corrected.
Over long period of time, the household income is still a very good way of valuate housing price. Can a job interviewer accept a job ($10,000 a month) at SF knowing $6000 rent or $7000 mortgage? Just be patient, when rate goes higher, all this bubble will bust. It might take a long-time for mortgage rate to go to 6-8%, but it will be corrected.
This comment "These people are apparently not thinking about the supply response that so big a price increase would generate." shows that Mr Schiller does not understand the SF housing market. There IS no place to build more housing in SF or on the SF Peninsula, which is why housing prices and rents are rising - which is as fast as new hi tech workers are hired .
1
All the more fun when Tech Bubble 2.0 bursts.
1
All the venture capitalists who went to the sidelines after the 2001 crash really regretted it in their pocket books, because there were a lot of great technologies developed during that period. Think how much better tech was in 2006 than in 2001, all that developed in the immediate aftermath of the crash. The management theory of Silicon Valley is now "fail fast, fail often", and this really works, and no one is going to be pulling back from tech having learned these lessons, at least until new stuff stops getting invented, which is not imminent. A pullback or correction, for sure, but that will just mean more angel money and VC money for straight out of college entrepeneurs. Tech is here to stay.
There is plenty of land. There are just too many owners opposed to new development living on it. Remove development restrictions and you could knock down the crummy, poorly constructed ranch houses which fill almost all of San Jose and build 2 or 3 Manhattans with 5x the population in the same space. "No land" is a fiction invented by flat-earth anti-development haves to create artificial scarcity.
1
Why are we still discussing the "efficient markets" theory? Any child knows it isn't accurate. Only someone living in an ivory tower disconnected from reality could believe.
3
I think the best experts agree that "is or isn't" is a silly way to consider EMT, but nevertheless it is continuum along which every market "works" in terms of price discovery, or not. In this case Shiller proves that EMT isn't working for him in real estate because an expert such as himself can't figure out that you would have to build enough housing for all the richest Chinese, Japanese, and Korean tourist visa affluence migrants before prices would moderate. Do the population math, it is impossible.
1
Prof Schiller ignores the most compelling reason for buying homes: a vastly higher degree of control over your long term living expenses. True maintenance, taxes, and insurance may be out of your control, but they are a very small percentage of the monthly costs.
If you're renting you are most certainly paying these, plus a "markup" to cover your landlord's time and money in managing your home for you.
Fear is a far greater motivator, and fear of economic insecurity is the real driver behind the very rational economic actor's home purchase.
When your rental living expense increases 50% or 80% in five years, it can easily beggar and thwart any and all other financial and life plans.
This is occurring in desirable places to live in the US. If you're not aware of this, you probably don't live in one.
In some areas, in fact, the inflation in residential rents is actually greater than the inflation in house prices.
If you're renting you are most certainly paying these, plus a "markup" to cover your landlord's time and money in managing your home for you.
Fear is a far greater motivator, and fear of economic insecurity is the real driver behind the very rational economic actor's home purchase.
When your rental living expense increases 50% or 80% in five years, it can easily beggar and thwart any and all other financial and life plans.
This is occurring in desirable places to live in the US. If you're not aware of this, you probably don't live in one.
In some areas, in fact, the inflation in residential rents is actually greater than the inflation in house prices.
6
Human beings are irrational, and the less liquid a market is, the more irrationality will come in with every transaction. Proper price discovery will always take a hit. And by the way cutting up home debt, i.e. home prices, into tradable instruments was partly what caused the financial crisis.
Plus at the end of the day you can't argue with falling in love with a certain house or a certain neighborhood. The best thing that you can wish for is that your way of looking at the world is unique, and other people love the place you want less than you. Until you want to sell it that is.
Plus at the end of the day you can't argue with falling in love with a certain house or a certain neighborhood. The best thing that you can wish for is that your way of looking at the world is unique, and other people love the place you want less than you. Until you want to sell it that is.
1
Financing also makes a difference. Stock margin is subject to being sold out; so when stocks start to decline, brokers ask for more margin or sell out investors.
Mortgages are different. So long as the borrower pays the payments, they can hold the asset, even if it is declining in price or even if there is no equity.
Thsi differecne explains why the dot com bust was very different from the housing bust. The dot com bust did not result in lots of losses by lenders who simply sold old buyers.The housing bust lead to massive losses by lenders who ended up owning the assests.
Mortgages are different. So long as the borrower pays the payments, they can hold the asset, even if it is declining in price or even if there is no equity.
Thsi differecne explains why the dot com bust was very different from the housing bust. The dot com bust did not result in lots of losses by lenders who simply sold old buyers.The housing bust lead to massive losses by lenders who ended up owning the assests.
According to many commenters, along with those recommending comments, the solution is said to be: discrimination against foreigners, or those who look "foreign" - i.e.: the "others." How disappointing.
My wife came here on an H1B visa from India. She manages the machine which cures more cancers than any other. We have been displaced multiple times from our housing, along with most of our friends, some citizens, some permanent residents, who work in Silicon Valley. The cash buyers who coming to the US on tourist visas not working here, they are basically the global 1% buying the school districts and real estate since they can. Ask any ethnic Uber driver in Silicon Valley and they will start raving about it. It is not about race, it is about the working class (i.e., anyone who has to work a job to earn money for housing) vs. the global 1%. Ban foreign purchases like Australia did, or end up with our smaller population replaced by the most affluent foreign populations, with citizen and permanent resident workers alike displaced from their housing.
1
Other countries have restrictions on foreign buyers of real estate - check out Nordic countries for instance.
Keep in mind that these are usually extremely wealthy people who came by their money in ways that aren't scrutinized the way a US citizen's purchase of a new home with CASH would be. Maybe we should be asking how this is fair to US citizens?
Keep in mind that these are usually extremely wealthy people who came by their money in ways that aren't scrutinized the way a US citizen's purchase of a new home with CASH would be. Maybe we should be asking how this is fair to US citizens?
Mr. Shiller nails it. The NAR pushes propaganda to the contrary as shills for the agents. I think Mr Shiller once proposed a futures market to help smooth this out. That would be a good thing. I guess that there would need to be regionality built in, since houses are a local market.
“There is a way for smart money to profit from an understanding of high prices. It is to build new houses and sell them before prices fall.
What spectacular insights we gleam from Robert’s piece, lol.
What spectacular insights we gleam from Robert’s piece, lol.
2
Worse yet, housing investment is usually highly leveraged, so wrong way bets on thing login up can end very badly, or make someone wealthy. If you visit Mexico, you will see half finished cinder block houses. Mortgages aren't common there, so you build as you get money, and a cinder block house can stand the elements while standing partially built for a long time. Ever hear of a housing boom/bust in Mexico?
Nope, 50% of the buying in most places is cash buying now, either from foreign investors or private equity.
2
Not being able to "short" the housing market has nothing to do with overvalued housing prices. Financial shenanigans ARE NOT productive use of resources, and simply distort markets.
What distorts the housing market begin with these factors: government incentives such as tax credits, subsidized mortgages (30 year or longer mortgages would not be profitable without gov't gaurantees), and rental subsidies. Then there is the misleading marketing meme that being a "homeowner" is what everyone should do because it makes sense.
I live in an upper middle class neighborhood. It used to be all homeowners, now I am surrounded by rentals (this has greatly distorted the market as many of the local sales have been to big rental companies), Why? Because most of the people who "bought" recently put shockingly little money into their "purchase". Most of the remaining long term "owners" have refinanced often with higher amounts, and still having 30 year terms.
We live in an age where we no longer pay our own way. From government on down, we are living on the backs of the future generations. We need to remake the term "home owner" and apply it ONLY to those who have PAID OFF their home. Otherwise you are still part of the renter class--only the rent you are paying is to the financial institutions.
What distorts the housing market begin with these factors: government incentives such as tax credits, subsidized mortgages (30 year or longer mortgages would not be profitable without gov't gaurantees), and rental subsidies. Then there is the misleading marketing meme that being a "homeowner" is what everyone should do because it makes sense.
I live in an upper middle class neighborhood. It used to be all homeowners, now I am surrounded by rentals (this has greatly distorted the market as many of the local sales have been to big rental companies), Why? Because most of the people who "bought" recently put shockingly little money into their "purchase". Most of the remaining long term "owners" have refinanced often with higher amounts, and still having 30 year terms.
We live in an age where we no longer pay our own way. From government on down, we are living on the backs of the future generations. We need to remake the term "home owner" and apply it ONLY to those who have PAID OFF their home. Otherwise you are still part of the renter class--only the rent you are paying is to the financial institutions.
4
There is a way to sell real estate short. Owners with no intention of selling can sell their property at a "too high" price and wait for an opportunity to replace it with a similar, or better, property at a lower price, or in a different area. This is not that unusual in a land where people love to make a profit and fight to get ahead of the other guy.
2
I'd argue that the term "efficient" is misleadingly broad. A better term might be "agile markets hypothesis."
For example, if you buy a newspaper and there a news story about how a giant medical study has proven that iPhones cause brain tumors, and then you start thinking maybe you ought to call your broker and have him sell your Apple stock, well, you are too late. The stock market is a lot more agile than that at dealing with new information.
On the other hand, there's no way to guarantee that the stock market's interpretation of information is correct. Some times it is, some times it isn't. Lots of people have outsmarted the market. On the other hand, it's very, very hard to consistently outsmart the market. While the market is fallible, so are you.
For example, if you buy a newspaper and there a news story about how a giant medical study has proven that iPhones cause brain tumors, and then you start thinking maybe you ought to call your broker and have him sell your Apple stock, well, you are too late. The stock market is a lot more agile than that at dealing with new information.
On the other hand, there's no way to guarantee that the stock market's interpretation of information is correct. Some times it is, some times it isn't. Lots of people have outsmarted the market. On the other hand, it's very, very hard to consistently outsmart the market. While the market is fallible, so are you.
1
The distortions come from property owners shielded by LLCs, LLP's, Corps and other legal scams.
This is a straw man argument, that some unnamed economist thinks that the SF residential market is "efficiently priced" -- whatever that might mean.
It ought to be obvious to anyone with enough intelligence to pass high school algebra that if the prices of a commodity increase faster than incomes, the market for that commodity becomes smaller. That is just as true for housing as for automobiles. While temporary surges in prices are possible - especially after the collapse of a bubble or at the end of a recession - the rate of increase in housing prices must at worst match wage growth if it is to be sustainable.
I started keeping track of the Case-Shiller index for my area when I built my home in 1990. The object was to see whether the local real estate taxes tracked valuation increases and inflation. Interestingly enough, for the first ten or eleven years the three items tracked pretty well, but then the CSI and real estate taxes started increasing significantly faster than inflation. The local housing market was caught up in the frenzy, with many people buying or trading under the illusion that this was going to continue forever, and that they would become rich from it. The events of 2008 proved them wrong, as prices and real estate taxes plummeted. My data show that at the depth of the recession, the valuation of my house was just over what it would have been had it been determined by inflation alone. Since 2010 the prices have been growing faster than inflation leading me to conclude that the public and financial community have learned NOTHING. A bubble exists; when will it burst?
I started keeping track of the Case-Shiller index for my area when I built my home in 1990. The object was to see whether the local real estate taxes tracked valuation increases and inflation. Interestingly enough, for the first ten or eleven years the three items tracked pretty well, but then the CSI and real estate taxes started increasing significantly faster than inflation. The local housing market was caught up in the frenzy, with many people buying or trading under the illusion that this was going to continue forever, and that they would become rich from it. The events of 2008 proved them wrong, as prices and real estate taxes plummeted. My data show that at the depth of the recession, the valuation of my house was just over what it would have been had it been determined by inflation alone. Since 2010 the prices have been growing faster than inflation leading me to conclude that the public and financial community have learned NOTHING. A bubble exists; when will it burst?
1
I'm surprised that Shiller is taking the view that supply alone can reduce the growth in housing prices. While, in theory, that is true, many jurisdictions in the U.S. have various restrictions that prevent the wholesale building of housing units. These include density restrictions, minimum lot size requirements, the zoning of land to low density residential uses, urban limit lines, and even the downzoning of land to a lower density use.
These restrictions have tended to be imposed in areas with high population density, particularly the northeast U.S. and the Pacific Coast states (California, Oregon, Washington) but elsewhere as well (e.g., Santa Fe). In such places, the restrictions have tended to keep housing prices high for very long periods even with the collapse in housing prices between 2006 and 2011. For example, with San Francisco, which Shiller mentions, there is virtually no new residential development and housing prices there are among the highest in the U.S.
At an aggregate level, yes, it is true that supply can balance demand. But, for any one locale, local regulations can play a very important part in keeping the supply well below that of the demand. The growth, then, occurs elsewhere in the region, usually at the periphery. Unless that problem is addressed, urban sprawl becomes part and parcel of the American housing scene.
These restrictions have tended to be imposed in areas with high population density, particularly the northeast U.S. and the Pacific Coast states (California, Oregon, Washington) but elsewhere as well (e.g., Santa Fe). In such places, the restrictions have tended to keep housing prices high for very long periods even with the collapse in housing prices between 2006 and 2011. For example, with San Francisco, which Shiller mentions, there is virtually no new residential development and housing prices there are among the highest in the U.S.
At an aggregate level, yes, it is true that supply can balance demand. But, for any one locale, local regulations can play a very important part in keeping the supply well below that of the demand. The growth, then, occurs elsewhere in the region, usually at the periphery. Unless that problem is addressed, urban sprawl becomes part and parcel of the American housing scene.
3
California is the exception that proves the rule: The NIMBY state par excellence from its inception in the 1920s by an industrial real-estate holding company bizarrely named the Southern Pacific Railroad, the Golden Staters first tried to keep minorities out of their desert paradise by attaching racially-restrictive covenants to 95 percent of the titles and leases in (e.g.) Los Angeles county only to have to pass Proposition 14 when the 1964 Civil Rights Act inconveniently appeared and then continued to unsuccessfully evade the federal statutes in a series of court cases before throwing in the towel in 1974 and turning their attention to other restrictions they could invoke to drive up prices in a waterless, arid ocean-front hot house. Curiously, self-styled liberal Paul Krugman thinks this kind of rigged market is demonstrative of an advanced society although a quick read of Adam Smith will disabuse you of that notion.
The market is white hot right now in Seattle. But it's less driven by investors looking for a profit than average buyers who just want a home, though there is also an influx of foreign- mainly Asian- investors looking for a safe place to park their money (and they are buying residential homes!). The primary dynamic is a lack of inventory and strong population growth. Most of the new building is in apartments and multi family condos/town homes, not single family homes. So single family home owners suddenly find themselves sitting on a gold mine after 7 years of weak prices. Interestingly, the strong economy and residential market in Seattle is not translating to vacation homes in rural parts of the state, like the San Juan Islands, where prices are still depressed from the Great Recession. Microsoft and Amazon are no longer minting millionaires, so even highly paid young professionals don't have the extra money for vacation home investing. They are lucky just to afford a primary residence in town!
1
Investors know a good thing when they see it, and real estate is the one investment that keeps paying dividends, even in bad economic times. Why is the median price of an apartment cost $4,000 in San Francisco? Because it can. And if the landlords could extract 2X that amount, they would build a bridge to get to that. Think about it. Maslow's hierarchy. We need food and shelter. Can't survive without them. Ergo, the best money makers out there, and immune to any consumer whim.
As we move into a sharing economy, the millennials are going to have to decide if they want to have total control over their living situation, or if they want to sit on an escalator of rising rents for the next millennia. Smart money would have young folk locating in smaller cities that have a fraction of the housing costs, and work remotely, as that's how this new economy works for many anyways.
Blackstone Group and others didn't sink tens of billions into real estate after the 2008 crash on a wild bet...to be a landlord is to have control, mostly over your income. Renting is the bad bet, and assuming a large mortgage in an expensive market may not be the wisest of moves, perhaps small towns may be America's best hidden asset.
As we move into a sharing economy, the millennials are going to have to decide if they want to have total control over their living situation, or if they want to sit on an escalator of rising rents for the next millennia. Smart money would have young folk locating in smaller cities that have a fraction of the housing costs, and work remotely, as that's how this new economy works for many anyways.
Blackstone Group and others didn't sink tens of billions into real estate after the 2008 crash on a wild bet...to be a landlord is to have control, mostly over your income. Renting is the bad bet, and assuming a large mortgage in an expensive market may not be the wisest of moves, perhaps small towns may be America's best hidden asset.
4
"Yet the smart money can’t find a profitable way to correct such errors today."
So, in fact, the smart money can correct such errors today, but not in any manner that would be profitable to them?
In order to protect banks and financiers from over-lending in the real estate arena, government could restrict lending, as it already does with purchases of stock. However, economists wouldn't dare propose such a thing, due to the large number of homeowners who are waiting in place for just the right sky-high real estate bubble to sell into. Undoubtedly, there are some economists among them.
So, in fact, the smart money can correct such errors today, but not in any manner that would be profitable to them?
In order to protect banks and financiers from over-lending in the real estate arena, government could restrict lending, as it already does with purchases of stock. However, economists wouldn't dare propose such a thing, due to the large number of homeowners who are waiting in place for just the right sky-high real estate bubble to sell into. Undoubtedly, there are some economists among them.
Because the field of economics had its birth during the age of the Enlightenment, one of its perpetual curses is it still posits that humans are rational actors, which we have learned since the age of Freud, and the subsequent depth psychology models that followed after him, we are not.
Economics is best viewed as a field of applied psychology, but the question after that is which psychology the economist believes in. If it is behaviorism, this economist is much more likely to be a conservative and one who still believes in the rational models of economics, which are erroneous, and lead to crummy political decisions in the real world of human beings. Rationally, we should all put away enough money to live on in our retirement years. In truth, very few people can do this, hence the importance of programs such as Social Security.
The mid-00's housing bubble and its subsequent collapse show how many factors can negatively influence the housing market, including outright fraud by home loan originators and banks.
7
In my state's Grand Strand coastal area, the US Attorneys were able to convict people in criminal conspiracies that involved everyone from the developers, appraisers, bankers and real estate agents to the buyers who provided falsified income information to get a loan, expecting their co-conspirators to be able to re-sell the properties at higher prices and split the profits.
Everybody wanted a piece of the action before the loan got sold off to who knows where.
Everybody wanted a piece of the action before the loan got sold off to who knows where.
Depending on shorting to regulate markets is foolish, even for the stock market. Bears tend to be wiped out in long booms, so become less numerous as they are more needed. The only good way to make money by shorting is to have inside information, or actual control of some aspect of prices, not things which should be encouraged.
There is no alternative to strict regulation of markets - without this they will normally destroy themselves sooner or later.
There is no alternative to strict regulation of markets - without this they will normally destroy themselves sooner or later.
5
If one is bearish, one could instead buy a sequence of puts (which are time-limited options to sell a security or other asset at a predetermined exercise, or "strike", price). That way, if the boom goes longer or higher than anticipated, at least one's loss is limited to what one paid for the put, unlike with selling short, where there's no limit to one's potential loss.
Schiller is 100% correct about EMT. It's total nonsense. Most markets work more or less efficiently for much of the time. That's the most that can be said for them. As for investing in RE, you can actually do reasonably well. There's no shortage of value investors in RE just as there are in equity markets, who have bought low, been patient, and reaped a rich reward. On the other hand get rich quick schemes seldom work out.
2
New housing *is* being added in the SF Bay Area at a furious rate. Old industrial sites converted to massive apartment developments. Underutilized sites (such as the Bay Meadows horse racing track and former salt ponds in Redwood City.) Dormant sites that have been held for development for many decades. Sites owned by failing churches. Blocks of one-story retail being converted to stores-with-three-stories-of-apartments above. Large lots in older neighborhoods being split. Smaller, older houses being replaced by pretentious monster homes.
9
This commentary assumes that speculation is driving prices. But people and families buy houses. They buy usually based on the neighborhood and schools. It seems to me that supply and demand drive the prices. If the author thinks something else is driving prices, then he should explain.
6
About a quarter of the houses sold in the San Francisco Bay Area in the last few years are to Chinese buyers who are looking for overseas investments to park their money in. The recent gyrations of the Chinese stock markets are indicators of one reason why they're seeking more stable investments outside of China.
8
In Florida after the housing crash in 2008, hedge funds and investment banks were the first buyers to come back in. We saw it firsthand. There were virtually no "people" in the market, many being underwater on their mortgages. These were investments only, to be flipped at the first opportunity.
6
Housing prices are driven by jobs in commuting distance,salaries and interest rates and in some places like NY and SF by foreigners looking to park some of their money outside the reach of their fickle and crooked governments
Thanks for the analysis, but what about those of us who buy homes mostly for our primary places to live. Yes, it is a big investment for us, and we do hope to make some money on a home after living there 10+ years. But unfortunately, we are subject to all the those bubbles and booms and busts in the housing market even if we have no interest in them as investment issues. Sometimes you have to buy a house at a certain time because you have other reasons; e.g. a job move, change in family size, change in financial situation, etc.
17
The question I have is why should we even be considering residences as "investments" or, at least as investments that are expected to have a high pay-off? I get that in major cities and some other hot markets, prices can rise fast, in part at least because of issues of supply and demand. But for the most part, we once considered buying a home as a modest, low-risk investment and a prudent way to manage your money long-term, not a way to make a killing in a few years. This fixation on our residences as investments is part and parcel of a mentality that says the only important thing in life is to make money, and unfortunately it contributes mightily to the irrational distortions we see in so many places.
75
This is a thing that I do not understand about Americans in general. Housing is the only business where the cost of MAKING the product has NOTHING to do with the actual price people will pay. There is no correlation whatsoever.
To fill in the hole created by declining median wages, the U.S. government has had to pump trillions of dollars into the financial system to make lending cheap. How long do you suppose this can continue? Did we learn nothing from 2004-2009?
Your primary residence should be where you live. Nothing more, nothing less. It should affordable. If you cannot find anything near you: hey, it's a big and FREE country. I am sure there is somewhere in the country that is not NYC, SF, LA, DC where you can build a comfortable life.
Some people never figure that out. Unfortunately.
To fill in the hole created by declining median wages, the U.S. government has had to pump trillions of dollars into the financial system to make lending cheap. How long do you suppose this can continue? Did we learn nothing from 2004-2009?
Your primary residence should be where you live. Nothing more, nothing less. It should affordable. If you cannot find anything near you: hey, it's a big and FREE country. I am sure there is somewhere in the country that is not NYC, SF, LA, DC where you can build a comfortable life.
Some people never figure that out. Unfortunately.
Yes, and if you are a SuzeOrman fan (as I am) you will view your place of residence not as an investment to be flipped at the first opportunity, but rather as a home. Its financial value, to the extent that it has any, is as a hedge against inflation. That is, if you are smart enough to get a fixed rate mortgage.
I cannot speak for everyone, of course, but I've kept very close track to the expenses and financial benefits from owning a house since I build in 1990. As it turns out, I could have lived in a nice apartment for the same money. Not that I would prefer that, I'm just saying that house ownership is not all it is cracked up to be, financially speaking.
I cannot speak for everyone, of course, but I've kept very close track to the expenses and financial benefits from owning a house since I build in 1990. As it turns out, I could have lived in a nice apartment for the same money. Not that I would prefer that, I'm just saying that house ownership is not all it is cracked up to be, financially speaking.
On the other hand, the real estate market can't be gamed like the stock market. There are no high frequency and algorithmic programs shaving money off your trades, there is no insider trading, there are no crooked traders packaging and selling worthless securities like CDOs, there are no ratings agencies stamping those worthless securities with triple A ratings, there are no money managers churning your account to generate fees, and there are or blood-sucking-squid investment banks and hedge funds making sure the average investor is always trading at an unfair disadvantage. Sure, in real estate there are fast-talking dishonest brokers, but that's all out in the open and the average investor can smoke that out. Give me the real estate market any day.
25
"On the other hand, the real estate market can't be gamed like the stock market."
True. It can be gamed more. There are laws against certain kinds of deception in the stock markets, very few in the real-estate markets.
True. It can be gamed more. There are laws against certain kinds of deception in the stock markets, very few in the real-estate markets.
1
The private equity industry owns more than 250,000 homes in this country. What about all of those flippers, unscrupulous real estate agents and appraisers, fly-by-night lenders (like New Century and Countrywide) before 2008?
You were saying?
If there is money to be made, you can be sure the criminals will be nearby.
You were saying?
If there is money to be made, you can be sure the criminals will be nearby.
2
If you invest with a long-term, buy-and-hold strategy in extremely low-fee (they exist) broad-based indexed funds, you will not be "gamed." Or, if you have the money, buy and hold, long-term, a highly diversified portfolio of directly-owned stocks. What you have in a house is a heavy investment in an extremely undiversified, illiquid (cashing out if needed can take a long time with high transaction costs), portfolio of one risky (yes, risky) asset that is subject to neighborhood decline, local area economic decline, or even just a peeling-paint next-door neighbor who keeps a barking, snarling pit bull and a yard strewn with old car parts.
1
In Canada, we are in one doozie of a bubble. Median price for an average home in Toronto is well over $1 million. This will not be able to sustain itself longterm because wages are stagnant, and full-time job security more scarce.
7
Obviously the good professor needs to get out from behind his books and look at the real world..especially in the SF Bay area. As mentioned below, there is NO supply response in SF or Silicon Valley since zoning restrictions have limited available space thereby limiting supply. "That would mean a net 150 percent increase in a decade. These people are apparently not thinking about the supply response that so big a price increase would generate" Guess what professor, I bought a house in a mid-range development in the Bay Area for $900K in 2008. Just had it appraised at $2.6M which is more than 150% increase in LESS than 10 years. Gotta love these "academic" articles.
25
When the residents of the SF Bay area find out their mid-range development home might realize $2.6 million, look for more of them to come on the market. Everyone loves a profit, but not everyone is that in love with living in the SF Bay area (or anywhere else). How many wanna be retired will consider moving somewhere less pricey for their golden years, and would like to have their lagging retirement accounts fully funded now?
Mark, don't forget that 2008 was the peak of the recession. 150% increase after buying low in 2008 versus 150% increase after buying at high in 2015 : not really apples to apples comparison.
You are in a bubble. Enjoy.
"...you cannot safely rely on “comparable sales” to judge that the price is fair." So many people, including appraisers, speak with such absolute confidence about home valuations. I have always been sceptical. I completely agree that the real estate market is highly irrational. Realtors, like stock brokers, help stoke irrational buying. I believe it is very difficult for an ordinary person to be rational with home and stock buying. Unfortunately the professionals want to make money on us, and often do not help the buyer to be rational.
7
My impression is that housing bubbles aren't uniform across the U.S. If they're not, Prof. Shiller might want to write about why some geographic areas are bubbly and others not, and explain what this difference means for bubble management.
13
People live on the coasts for the same reason people rob banks and housing costs rise with demand.
In a RATIONAL market, mortgage interest rate would be 2% in Dallas and 10% in SF due to the price risk. The market did not collapse after 2008 in Dallas whereas they did in the bubble markets on the coasts. And, the price-to-income ratios in Dallas (despite recent appreciation) does not (and probably never will) reach the ridiculous levels on the coasts.
The main difference is that the amount of housing in the pipeline in Dallas more closely matches growing demand. And, when the economy was bad, the construction stopped to balance with lower demand. Parts of the country that are landlocked are basically capped out and the only direction they can build is either up or over water.
The main difference is that the amount of housing in the pipeline in Dallas more closely matches growing demand. And, when the economy was bad, the construction stopped to balance with lower demand. Parts of the country that are landlocked are basically capped out and the only direction they can build is either up or over water.
1
Excellent comment, Larry. A way to do it would be for Fannie Mae, Freddie Mac, mortgage insurers to adjust their MBS guarantee fees or insurance premiums based on perceived local market sales price risk, i.e. "frothiness", if they don't do it already. Don't know if the agencies (who, anyway, have statutory/regulatory loan limits) can legally do that. However, the MBS market investors (in both agency and private label) would in theory be able to discount the prices of frothy-market-heavy MBS pools, if they had the data on the underlying mortgages, which of course as everyone knows nobody bothered with in the run-up to 2008 ("no see, no buy" should've applied, but didn't). (BTW, with agency MBS, the agencies take the credit risk, but investors still would have greater froth-default-generated prepayment risk to price in.)
"There is a way for smart money to profit from an understanding of high prices. It is to build new houses and sell them before prices fall. "
aka: Greater Fool Theory
aka: Greater Fool Theory
6
I'm not buying the argument that short-selling really makes a market more efficient (and rational) and prevents bubbles. In a bubble, irrationally exuberant optimists will outnumber rational realists. That's what a bubble is. Unless the bubble's just about to burst, anyone taking a short position will lose out as the market keeps on climbing, like a wave passing over them.
An interesting general question is why we seem to be seeing a succession of one bubble after another now. Is there an excess of capital floating around relative to available investment opportunities? Have investor expectations and time horizons fundamentally changed? Are there government tax and other policies which might be to blame? Understanding what systematic is at play here would be worth rigorously analyzing.
An interesting general question is why we seem to be seeing a succession of one bubble after another now. Is there an excess of capital floating around relative to available investment opportunities? Have investor expectations and time horizons fundamentally changed? Are there government tax and other policies which might be to blame? Understanding what systematic is at play here would be worth rigorously analyzing.
11
There are many "housing markets", subject to varied price pressures. A recent article in the San Diego Tribune calculated that 40% of the cost of a new single family home in San Diego is accounted for by indirect costs such as fees and regulations. This isn't unreasonable, but rather a reflection of the fact that new homes are built in planned communities where the costs of infrastructure, including schools, parks, libraries, etc. are now included in the cost of the homes. As more and more amenities are expected and required (solar panels, etc.), over time there as an upward pressure on prices independent of supply/demand.
2
Correction: San Diego Union Tribune
"As more and more amenities are expected and required (solar panels, etc.), over time there as an upward pressure on prices independent of supply/demand."
Well, yes, but including the cost of either amenities or expenses arising from regulations does not make the price of a house irrational.
Well, yes, but including the cost of either amenities or expenses arising from regulations does not make the price of a house irrational.
2
As I said "This isn't unreasonable". Perhaps I could have used the word irrational, but it was part of my point that a significant portion of the rise in home prices in some areas over time is a result of factors that are not accounted for by a simple efficient market model.
There is a difference between "efficient markets" and "rational markets." That's particularly true with real estate where every asset is unique. (No two separate parcels of real estate can be in exactly the same location.) A market can be efficient in terms of reflecting all available information, while still being irrational in terms of being driven by emotion rather than analysis.
You may argue that the market isn't rational, but I'd be wary of betting against the market. It's never a bubble until it bursts.
You may argue that the market isn't rational, but I'd be wary of betting against the market. It's never a bubble until it bursts.
7
Why should we assume that the "smart money" sitting in windowless offices in NY or CT will be smart and benign forces, using the tools Dr. Shiller desires to push prices only in the right direction and in the right amount? The evidence from the crisis about the smart money's ability to see and end a bubble non-existent. The best defense is to make sure mortgages are made to borrowers that have the ability to repay. This will help anchor prices to some degree to economic fundamentals in most markets. A single, sound national "ability-to-repay" standard should have come from Dodd-Frank reform, but the opportunity to achieve this helpful policy outcome was lost in the implementation of the rule as different federal agencies adopted their own, conflicting standards.
15
Traditionally, a national "ability to repay" standard was enforced with great success (long-term average yearly loss rate of only 4 basis points, if I recall correctly) by the credit policy departments of Fannie Mae and Freddie Mac, the private/public "agencies" that have long dominated the conventional (i.e. non-FHA) mortgage market. As it has been many years since I departed from the agency world, I don't know what they do now, but I assume there are still credit policy standards. In fact, even during the worst years of the mid-2000s, those mid-2000s books of business dramatically outperformed those of private-label MBS, experiencing a fraction of private-label's losses.
It's not rational to be bidding for your first home against a suitcase of shady Chinese money that is willing to bid 40% over asking and can close in a week, no mortgage or contingencies?
Here in the Bay Area, that's just another weekday. As long as we continue to let foreigners use California real estate as an offshore piggy bank and safe haven because they dont trust their own markets, there will be no rationality around here. Combine that with rampant NIMBYism, and a tech boom, and you have an entire generation of would be American homeowners completely priced out of their own domestic RE market.
Here in the Bay Area, that's just another weekday. As long as we continue to let foreigners use California real estate as an offshore piggy bank and safe haven because they dont trust their own markets, there will be no rationality around here. Combine that with rampant NIMBYism, and a tech boom, and you have an entire generation of would be American homeowners completely priced out of their own domestic RE market.
113
It's not just offshore. The fastest growing percentage of immigrants in California is Chinese.
6
Manhattan is filled with multimillion dollar apartments bought by Russian oligarchs, Arab sheiks, and Chinese Communist Party members laundering their ill gotten gains.
It is an outrage that criminal foreign nationals are allowed to buy real estate using shell companies to conceal their identities, while paying no state or federal taxes.
And yet both political parties turn a blind eye to these blatant violations of international law.
It is an outrage that criminal foreign nationals are allowed to buy real estate using shell companies to conceal their identities, while paying no state or federal taxes.
And yet both political parties turn a blind eye to these blatant violations of international law.
50
Who knew that Communism was so lucrative?
Ah yes, some animals are more equal than others.
Ah yes, some animals are more equal than others.
It is a terrible shame when humans refuse to follow the divine dictates of the Efficient Market Theory. Why are all those sinners misbehaving? What will be the punishment meted out by "The Invisible Hand?" Will it be a slap-down or just a wave of the finger? The EMT says that all aspects of our lives are to be monetized, exploited and traded for maximum utility in the form of cold cash.
Of course all of those pesky regulations like housing codes to make sure that the dwelling are safe as places to live. But are they places to live or assets to be traded? The divine EMT says that everything, even you and your family members are commodities to be traded to the highest bidder. Sorry kids, you've been traded and honey, I just sold your liver. Long live the divine EMT!
Of course all of those pesky regulations like housing codes to make sure that the dwelling are safe as places to live. But are they places to live or assets to be traded? The divine EMT says that everything, even you and your family members are commodities to be traded to the highest bidder. Sorry kids, you've been traded and honey, I just sold your liver. Long live the divine EMT!
21
Ah, only there is no "supply response" in San Fransisco.
49
There is actually an incredible amount of development in San Francisco. One can hardly get around town due to all the cranes and lane closures for construction. New high-rises, mid rises, 4 plexus and the rehabbing of existing housing stock. Just lots and lots of people who want to live here, as well as the aforementioned foreign investment.
10
Really? Big deal. There are more than >>60,000<< new units of apartments, homes, condos and town homes under construction in the Dallas area this year alone. What is under construction in SF is a rounding error in Dallas.
In the Bay Area -- the supply response is limited to building luxury housing.
1
Proffessor Shiller, I'm surprised your discussion did not mention the impact of the mortgage interest rate deduction. This multi-hundred billion dollar annual subsidy is arguably the biggest reason the market behaves irrationally. Your thoughts?
39
The tax subsidy has long since been already priced into the market. What would cause a huge market shock would be to totally end it, which consequently is highly unlikely to ever happen.
I'd bet professor Schiller assumed people would realize that the mortgage interest deduction is priced into the market (making homes more expensive).
What surprised me, was he didn't mention was how government inhibits investors from increasing the supply of housing via numerous means: zoning restrictions, legislated open spaces, an inability to put more units on an existing lot, prohibitions on renting rooms, an expensive and politically challenging permitting process (such as getting utilities built out to open land), and voters who don't want new developments, among others.
What surprised me, was he didn't mention was how government inhibits investors from increasing the supply of housing via numerous means: zoning restrictions, legislated open spaces, an inability to put more units on an existing lot, prohibitions on renting rooms, an expensive and politically challenging permitting process (such as getting utilities built out to open land), and voters who don't want new developments, among others.
But mortgage interest deductions are not "new". They have been in place a long time. This would have no effect on new bubbles, as they have already been factored in.
Granted, were the interest deduction to be removed, this would have a profound effect on the real estate market. And there would be quite a shock to renters who suddenly find themselves paying what would have been the deduction to the landlord.
Granted, were the interest deduction to be removed, this would have a profound effect on the real estate market. And there would be quite a shock to renters who suddenly find themselves paying what would have been the deduction to the landlord.
It's not the monthly payment, eventually it's the amount of principal that matters. Life is sure fun until that day comes, though.
I feel sorry for people paying 2x, 3x, 4x or much higher multiples of their annual income for homes (or condos). Don't you have something better to do with your life than be a house slave?
I feel sorry for people paying 2x, 3x, 4x or much higher multiples of their annual income for homes (or condos). Don't you have something better to do with your life than be a house slave?
5
"It's not the monthly payment, eventually it's the amount of principal that matters. Life is sure fun until that day comes, though."
What does that mean? I can't make any sense out of it in relation to home ownership.
What does that mean? I can't make any sense out of it in relation to home ownership.
That comment makes no sense, but as I asked a friend who is underwater on his modest home, 'How much would you be paying in rent all this time?'
There is no free lunch. Either way, renting or owning, you will not have the money in your pocket, but at least owning you are building equity in the long run *and* you have a tax deduction.
There is no free lunch. Either way, renting or owning, you will not have the money in your pocket, but at least owning you are building equity in the long run *and* you have a tax deduction.
1
I can't make sense of freewary's statement either, except as an endorsement for renting over buying (or perhaps a Millenial aversion to commitment?). The problem currently is that renters are paying as much or more per month. We have a $1k mortgage payment (including taxes/insurance). We would pay $1500 to rent the same housing. So you can either be a "house slave" and have SOMETHING back in 15 or 30 years, or be a slave of your landlord and be guaranteed to end up with zilch.
There will never be an "efficient market" for housing in the SF/Silicon Valley area. House prices did take a hit after 2008, but the 10% decline was lower than most "hot real estate markets". The high salaries assure a constant supply of new home buyers, and the salary levels are driven by high home prices. It's been this way, year in, year out, for the 5 decades I've lived here.
It's an area that is geographically and geologically constrained. You can't build houses in an ocean, and about half of the dry land is on top of several major earthquake faults. If you've ever been in a high rise building during a 6+ earthquake, you understand that zoning for high density housing is not a good idea. Buying a house in Silicon Valley is like buying a vintage Ferrari. Only the foolishly wealthy can play.
Just before a major IPO, the market dries up. Houses for sale are taken off the market. The day after the IPO, they are back on for 2X the previous price and they sell for way over asking price. Even without timing your sale to an IPO a homeowner can easily realize more than the 150 percent increase in a decade that is hypothesized (as unrealistic) in this article.
It's an area that is geographically and geologically constrained. You can't build houses in an ocean, and about half of the dry land is on top of several major earthquake faults. If you've ever been in a high rise building during a 6+ earthquake, you understand that zoning for high density housing is not a good idea. Buying a house in Silicon Valley is like buying a vintage Ferrari. Only the foolishly wealthy can play.
Just before a major IPO, the market dries up. Houses for sale are taken off the market. The day after the IPO, they are back on for 2X the previous price and they sell for way over asking price. Even without timing your sale to an IPO a homeowner can easily realize more than the 150 percent increase in a decade that is hypothesized (as unrealistic) in this article.
23
Uh, HK and Tokyo has. They took several islands off the coast and FLATTENED them and then used the earth to create several square MILES in the bay and then built a new airport and new housing on top of it.
Of course, people can just move out. Despite the run up in prices in other parts of the country, they are still cheap relative to the ridiculous income multiples on the coasts. Who says you have to live in SF to work with the Internet and VPN?
Of course, people can just move out. Despite the run up in prices in other parts of the country, they are still cheap relative to the ridiculous income multiples on the coasts. Who says you have to live in SF to work with the Internet and VPN?
There is also a matter of all that SURPLUS from China coming back to our shores. Real Estate is a major way of securing citizenship and free schooling and an exist from enemies in China. This is not just a matter of markets. It is having a huge cultural effect that no one seems prepared to talk about for fear of racism. Is it racist to say that a huge illegal influx of people is culturally significant? We talk about the Mexicans, how about the Chinese?
1
Home prices dropped more than 10% after 2008. Here in San Jose about 50%. Now they have doubled since 2011. Price to rent multiples are historically high. Interesting to see what happens if the interest rates start to slowly go up. Lets say 30 year mortgage goes to 6% in two years, that $4000/mo payment goes to $5000/mo. My guess is that price/rent multiple goes from the current ~25 to ~17 (i.e. 100/4 to 100/6)
The San Francisco area has extreme governmental building restrictions. It is almost impossible to increase the supply of housing quickly or even slowly. No elasticity here.
40
I have always seen the residential real estate market as a low return, high risk investment. It is all the more risky because of the 90% to 97% leverage for most first new buyers. When interest rates were very high back in the 1980s, the mortgage interest deduction was a huge subsidy advantage for high income buyers. Variable rate and balloon loans added to the risk Maintenance and updates can be a big burden, especially for older homes. And all of that preceded the fraudulent behavior by Wall Street and big banks, which collapsed the market.
The lesson to buy something you can easily afford, including taxes and maintenance and plan to live in it for decades, otherwise rent.
The lesson to buy something you can easily afford, including taxes and maintenance and plan to live in it for decades, otherwise rent.
36
Well said. Please see my posts above on owning vs. renting. Many of these comments seem to reflect a view that the San Francisco and New York City housing markets are the only ones anybody should be interested in, when, in fact, SF, NYC, and a few other markets are anomalies of limited interest to anyone who doesn't live there.
Obviously It’s a result of the damaged actions of the Congress. Everyone should admit this reality, in order to fix it.
Buying a house is buying a piece of the American dream. Over the long run it will probably be one of the best investments a person can make. One gets a nice deduction with their mortgage and property taxes along with the quiet as you live independently unlike an apartment. One has space and hopefully a delightful yard to enjoy. Although the NYC suburbs have not appreciated like the Northern California market we also do not have the earthquake worry nor the California forest fires.
6
Buying a piece of the American dream, OK, but a good investment, usually no. House prices on average rise no faster than inflation (Dr. Schilller's research) and homeowners consistently do not correctly factor in inflation / time value of money or maintenance costs when evaluating their return in a house. Actual returns are typically negative, compensated for by the fact that you have to pay to live somewhere. I have always bought multi-families as my primary residence, but even here you only really make a good return by holding long-term or by somehow timing the market when selling.
8
We bought our first house 14 years ago. We're still in it and I hope it will be the only house we buy. One thing we found was the mortgage deduction was so small. We could have done without it, it did not make a big difference to us. Now, we live in a state with no income taX, so property taXes have to make up the difference. Perhaps it's different in other areas. I think the deduction should be done away with, but many people we worked with over the years have mentioned it with regards to buying houses.
1
"compensated for by the fact that you have to pay to live somewhere."
Well, yes, you do. When I lived in NYC many years ago--long before the trend to co-ops and condos--I rented because it made sense at that time and in that place. Since leaving NYC, I've owned, first a condo and now a house. Our monthly mortgage payment has gone up since we originally purchased our house and yes, we have maintenance and other costs. Nevertheless, to rent a house like the one we have now in the neighborhood where we are now would cost three to four times what our monthly mortgage payment is. Staying put for a long time helps, of course.
Well, yes, you do. When I lived in NYC many years ago--long before the trend to co-ops and condos--I rented because it made sense at that time and in that place. Since leaving NYC, I've owned, first a condo and now a house. Our monthly mortgage payment has gone up since we originally purchased our house and yes, we have maintenance and other costs. Nevertheless, to rent a house like the one we have now in the neighborhood where we are now would cost three to four times what our monthly mortgage payment is. Staying put for a long time helps, of course.
Interesting. But there seem to be places where new residential construction is constrained by, perhaps, regulation or lack of land to develop. If (big if) people continue want to move to those places, what will put downwards pressure on house prices. I can't help thinking of San Francisco and the Seattle area.
24
My response is to sit tight in the house I bought more than 20 years ago, enjoying the combination of a low mortgage payment and a high salary.
17
Goody for you.
Now as for the younger generations, shall we just regard them as expendable?
Now as for the younger generations, shall we just regard them as expendable?
3
Well good for you. Will you vote for the repeal of Proposition 13 and the mortgage interest tax deduction to ensure a level playing field for the young and old?
2
And, since you live in CA, a low property tax courtesy of Proposition 13.
Houses / homes are an important part of the human experience. A person's view of his or her house often is not rational. The rich descriptions of homes in literature and films demonstrates they have a deeper pull on emotions than financial investments.
Think Bleak House. Think Tarra. Think Mansfield Park. Think Anne of Green Gables. Think House of Seven Gables. Think all of Edith Wharton. Think of Gatsby.
Think Bleak House. Think Tarra. Think Mansfield Park. Think Anne of Green Gables. Think House of Seven Gables. Think all of Edith Wharton. Think of Gatsby.
13
Or think the house overlooking the Bates Motel. Yes, Norman did have quite a connection with it.
2
27% over three years is alarming! California even more so, being vulnerable to Silicon Valley running out of steam plus lingering/repeat water crisis. Seems to me the lesson is to not seek profit from irrational, but run hard from crazy.
4
Yeah, well, when your snow shovel or heart valve breaks in January, ( and I'm going to the beach), when your looking at radar details of the Perfect Storm, (and I'm planting tomatoes), when the Plains folks are wondering if that next black cloud is the end of their town, well, we out here in CA have somes fears too. Like propery values in a great climate might actually stay down?
4
Much rain? Have fun drinking the salt water out of the contaminated depleted aquifers. Remember, there was a tremendous transfer of wealth from the East to the West to build reservoirs for unsustainable cities built in a desert. Your welcome.
8
@mpspex:
Just wait until the water situation worsens (and it will) then your tomatoes will wilt along with your property values :)
Just wait until the water situation worsens (and it will) then your tomatoes will wilt along with your property values :)
4
There's also the relatively new 30 year mortgage, which allows buyers to purchase homes for very low monthly payments. This makes purchasing a home cheap in the short term, and fairly expensive over 30 years. Many people forget that mortgages longer than 10-15 years used to be unheard of until relatively recently.
1
@ ME from NJ
Actually the 30-year fixed rate mortgage has been available to US homebuyers since 1954, backed by a Federal Housing Administration guarantee.
Actually the 30-year fixed rate mortgage has been available to US homebuyers since 1954, backed by a Federal Housing Administration guarantee.
12
Huh?
My WWII parents had a 30 year mortgage, as did everyone else on our block.
My WWII parents had a 30 year mortgage, as did everyone else on our block.
The self-amortizing 30-year fixed-rate mortgage was developed by the Federal government (as noted, the Federal Housing Administration) in 1934 as part of the New Deal to help address the Great Depression foreclosure crisis. In 1938, Congress created the Federal National Mortgage Association (aka Fannie Mae, which was in those days a direct, Civil Service, government agency) to provide liquidity in the market for those mortgages by purchasing them from mortgage originators and funding those purchased/held mortgages by issuing its own debt securities. The mortgage system has evolved considerably since then, but the seeds were planted by the New Dealers.
1
Well, then there's the fact that a savings glut in the investor class created by the Bush 43 tax cuts has been pursuing marginal return in successive asset bubbles. Too much money chasing too few goods in that end of the market.
44
People buy houses for the same reason doctors have affairs with nurses and techs at the hospital: because they can. I have a home in a resort area, where the prices of houses fell sharply during the crisis - it's a second home market. It has taken all this time to just about deplete the inventory of foreclosed houses. And what's happening now? A buying binge like the one preceding the crisis. Why are people buying second homes now? Because they can.
12
"These people are apparently not thinking about the supply response that so big a price increase would generate."
i think in this particular case Shiller is not thinking about the artificial restrictions on supply that exist in the San Francisco market (namely, strict zoning regulations). so long as those are in place, it's not crazy to think prices will double or more over the next decade, assuming the tech industry keeps growing.
i think in this particular case Shiller is not thinking about the artificial restrictions on supply that exist in the San Francisco market (namely, strict zoning regulations). so long as those are in place, it's not crazy to think prices will double or more over the next decade, assuming the tech industry keeps growing.
18
There are other significant restrictions on the SF market: an unbelievably slow permitting & review process; neighborhood opposition; lack of places to build.
32
My thoughts exactly, in SF (and SoCal as well) the regulations and fault line make it very difficult and costly to increase supply. In Chicago/NYC, you can build a skyscraper relatively easily in which thousands can live. In SF however, that same skyscraper has thousands in additional costs to make it safe in case of an earthquake. It cost approximately 4k to "earthquake proof" a house. Imagine that for a building thousands of feet high? The supply won't increase until the price justifies that additional cost.
9
Residential real estate prices are out of control in SF -- have been for a very long time. I don't see that changing.
1
Certain markets, however, are much more supply constrained than others. The Bay Area real estate market, due to regulation, does not present a supply response in areas that are commutable distance from San Francisco/Silicon Valley in the same way that one may expect in the rest of the country. Demand, on the other hand, seems to have little limit if an area's industry (in this case, technology) continues to attract new residents. This helps explain the persistently high pricing.
9
Dr. Shiller makes it sounds as if the inefficiency of the housing market is a bad thing, but it is precisely this inefficiency that makes real estate attractive to the individual investor. I cannot compete with a mainframe that can respond to a change in a stock price in nanoseconds, but I have a reasonable chance of successfully investing in real estate, where my competition is with people who simply want a place to live.
24
The effect mentioned in the article has its reasons and the most important of them is the availability of mortgage lending
2
Have you consistently made money speculating in housing?
6
Where is this booming real estate region where the buyers "simply want a place to live?" It doesn't exist in SF. Buyers want to be landlords and rent to leech off of others; want to stash cash in US investments; want to buy an American dream for themselves; want to buy their way into citizenship; etc.
You don't have a reasonable chance when global money (corrupt or otherwise) is buying in your local neighborhood.
You don't have a reasonable chance when global money (corrupt or otherwise) is buying in your local neighborhood.
57
Dr. Shiller, can you elaborate on the constituents on the S&P 500 Residential REIT index? (Some online research did not provide a clear answer to this question.) If the index includes residential REITs focused on investment in multifamily properties, then the lack of correlation with the Case-Shiller National Home Price Index seems understandable. Although REITs focusing on single-family homes have proliferated in the last couple of years, my understanding is that they are still a small fraction of the overall residential REIT landscape. And single-family home pricing trends can sometimes move counter-intuitively relative to the fundamentals that influence multifamily REIT pricing (NOI/NAV, FFO, AFFO, etc.).
That said, I agree that the notion of efficient markets in the context of single-family homes is preposterous due, in part, to the lack of shorting opportunities and the lack of (financial) sophistication of many investors in that market (i.e., owner-occupants). Thanks for this interesting read.
That said, I agree that the notion of efficient markets in the context of single-family homes is preposterous due, in part, to the lack of shorting opportunities and the lack of (financial) sophistication of many investors in that market (i.e., owner-occupants). Thanks for this interesting read.
6
And thanks for this interesting and knowledgeable comment. How refreshing! Restores my faith in the NYT comments section. And no, I'm not being sarcastic.
Prof. Shiller knows of what he speaks, but I'd add that lack of short-sellers is hardly the only problem with this market.
Because homes are purchased with borrowed money, there is considerable leverage; gains and losses are amplified just as in margin trading, leading to systemic risk and boom-and-bust cycles.
Because homes are purchased with borrowed money, there is considerable leverage; gains and losses are amplified just as in margin trading, leading to systemic risk and boom-and-bust cycles.
21
Except that mortgage lenders/investors can't "call" your mortgage loan, like a stock market margin call, if your home "value" goes down, as long as you keep making your timely mortgage payments. The call option on the mortgage loan rests solely with the borrower (he/she can prepay it at any time). That said, declining home prices often coincide with, and often are caused by, declining general economic conditions that lead to job losses, income reductions, etc., that force owners to sell, get deed-in-lieu, or get foreclosed, so in a larger sense the point is correct.