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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California tiered home pricing

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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Taming animal spirits in client buy-sell behavior

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