That’s right, you heard it from the lips of the great home pricing guru himself, Robert Shiller. Yes, that is the Robert Shiller, co-creator of the Case-Shiller Home Price Indexes and Distinguished Professor of Economics at Yale University.
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According to Shiller, real estate is not an investment that produces any guaranteed capital gain, as it is a depreciating asset. Shiller acutely identifies the money illusion that most Californians hold regarding the myth that real estate is a perpetually appreciating asset, which always produces a return on investment (ROI). This myth, as first tuesday has critiqued for many years, is improperly propagated by real estate professionals and unfortunately believed with implicit credulity by real estate buyers and sellers.
Shiller makes three key points regarding the real estate money illusion, all aligned with first tuesday’s commentary on this matter. Shiller argues:
- the money illusion is fueled by asset bubbles;
- historically, home price inflation runs at the rate of consumer inflation; and
- real estate is not finite in the same way as land (have you ever driven across Texas?).
The first point here is complex, as it includes many issues ranging from interest rates, supply and demand as well as a confluence of all the prevailing myths at play in the California real estate market. What is absolutely essential to grasp is the depreciating nature of real estate.
As Shiller remarks, locations go out of style, the tangible asset affixed to the property (the home itself) has a determined lifespan and it must be continually maintained to merely retain its value. Important for all to see is the evidence that asset appreciation is primarily driven by population densities (and the population’s income movement) rather than real estate’s so-called inherent value. If people were more stable in their conduct, real estate prices would not be so volatile.
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Beyond the basics: asset price inflation in the real estate market
Real estate asset bubbles (such as the most recent Millennium Boom) are man-made market phenomena that have nothing to do with real estate’s actual value. Rather, they are driven by speculation, competitive advantage and insufficient real estate and mortgage market restraints to prevent harm to our institutions.
If the lessons of this Lesser Depression have truly been learned, the Federal Reserve (the Fed) will not allow another bubble unless they willfully forget recent history. As many a speculator will learn, real estate prices will most likely continue to increase (after they hit bottom) around their historical average of 2% per annum (roughly the rate of consumer inflation) for a couple decades or so.
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Thus, any owner-occupant who “sold” a home under the pretense that it is a “good investment” ought to think twice about the vested interest of their faulty information source. The bottom line is this: a home is not an investment; it is shelter, the value of which must be maintained by its owner over time.
This does not mean that homebuying is a bad idea. It simply means that unless a homebuyer is willing to consider the critical economics driving home prices, he should not think of his shelter as an investment, the price of which is to be recouped on selling. Advice for the typical homebuyer? Use, maintain, sell and move on to new shelter when necessary — don’t let the fickle market be the only voice dictating your decisions.
re: “The illusion of housing as an investment” from fool.com
I think Mr. Shiller is making a distiction between two fundamental ideas/reasons people buy/sell homes. Each ligit in their own right, each governed by their own set of rules, laws, application, uses, and reasons for existing. And, one should be clear with themselves, at least, why they are selling/buying a home/investment/etc.
The beauty of real estate is the flexibility one has in moving from one intent/purpose to the other as the need/desire/opportunity arises. As with all things, real estate is open to interpretation as a commodity/resource/both according to the intentions of the individual involving themselves in the buying/selling thereof. I think the main idea here is for one to be sure/clear within oneself, and with others ( as far as one must be to create a legal contract) as to ones intentions/reasons for involving themselves with real estate/the real estate market, which can be, and often is, two seperate ideas/forces/realities.
According to Shiller and First Tuesday then, shelter can’t be an investment because bubbles, i.e., “man-made market phenomena” is a major factor in driving home prices? Doesn’t “man-made market phenomena” affect all investments? Isn’t an investment in any company impacted by the man-made market for the product it makes (iPads, make-up, tractors, etc.)? Isn’t that why companies spend so much on marketing?
As Norm commented, a great return can be made by leveraging a small down payment on housing that appreciates at the rate of inflation.
Also, while it’s true that the “fickle market” shouldn’t be the only voice to consider, it should be a major factor in deciding when to buy and sell. I think it’s better to buy when the fickle market results in low prices and interest rates, than to buy when it has driven prices to a bubble.
It seems there is a budding fervor building in our local markets here in the Southbay and Long Beach areas. Properties are scooped up fairly quickly. First Tuesday keeps stating that investors expect to turn a profit in 2-3 years, but perhaps the prime reason for buying is for rental income, not flipping?
After all, with a stock market that is robbing the public blind, banks that pay .01 % (one one-hundredth of one percent) on money market accounts and CDs, and slipping emerging market returns, the best possible investment is housing!
For anyone with the means or ability to procure a loan, it would be absurd NOT to buy property at this time. Even if values drop, rents would probably rise or at least stay the same with so many losing homes in foreclosures.
Yes but the secret is investors are still buying in a good and a bad economy buying notes, flipping paper back and forth to other investors and/or still buying physical property. And not just sitting back waiting for a regular retail buyer. So there is still money to be made.
His analysis ignores the rental value of a home. It has rental value, whether it is occuied by a tenant or the owner. If you buy a home that goes up with inflation while generating a rental income that goes up with inflation, it can be a pretty good investmant. If you buy a home with a small down payment and the rental value is comparable to the mortgage payment that 2% appreciation can easily become a 20%+ annual increase in equity.
Any asset is too expensive at some price. Still any investor who purchase real estate in a non bubble period of time will usually come out very well if the the property is held for an extended period of time.
The proposition that a home isn’t an investment is dead and buried deep within the Tax Code. Interest you pay on loans to buy your home is deductible from your ordinarty income just like the interest you pay on loans to buy and run a business, any business, is a legitimatedeductible expense. The Tax Code recognizes what some academics refuse to see: Your home IS an investment in a business – the business of keeping your kids and your dog out of the rain.
Califleurnia has the best weather on earth, and lots more attractions. Thank the electorate for choosing year after year raw nuts and green fruits to govern us into penury. This is the one thing that keeps the rest of the planet from invading us – and sends more and more of us each year to Texas and Nevada and wherever. But Califleurnia real estate is an investment if you do it right, especially in times of return-free risk such as these. It’s the Califleurnia, not the money, illusion…