Robert Shiller on Why Home Prices Could Fall for Several Decades 

No one knows what will happen, but it's not hard to argue that the housing market is nearing a bottom. Home construction is as unsustainably low today as it was unsustainably high during the bubble. The more builders like KB Homes (NYSE: KBH  ) and Lennar (NYSE: LEN  ) are beaten into submission today, the bigger the housing rebound will eventually become.

That's the good news. But here's a question few are asking: After the housing market does bottom, what you should expect from it going forward?

I asked Yale economist Robert Shiller -- of S&P/Case-Shiller housing index fame -- that question in an exclusive interview earlier this month. His answer might shock you: Not only do home prices, on average, not produce real returns over time, but history shows they could actually decline over the long haul. Have a look:

What do you think? Share your thoughts in the comment section below.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On December 23, 2011, at 2:43 PM, kjurow wrote:

    How can Prof. Shiller discuss where the housing market is heading over the next few decades without even mentioning the great bubble and collapse we are still experiencing?

    I write the Housing Market Report for Minyanville.com and focus on the growing shadow inventory and what it means for home prices in major metros for the next several years. Home prices since 1890 tells us nothing about today's situation which is really different. My shadow inventory numbers for major metros are solid, substantiated and scary.

    If prices continue their downward slide, it will have little to do with Prof. Shiller's explanation of real home prices over the last 120 years. It's time for economists to focus on what's really important right now.

  • Report this Comment On December 23, 2011, at 2:48 PM, TMFCheesehead wrote:

    Morgan-

    Fascinating stuff. "It's just a manufactured product." In financial terms, we'd all be wise to listen, so that we can put our emotional attachment to our homes in proper perspective.

    Brian Stoffel

  • Report this Comment On December 23, 2011, at 3:46 PM, DJDynamicNC wrote:

    Can't watch the video here, unfortunately, but you can be sure I'll check it out this weekend. In general, though,as someone who invests in securities and lives in houses, when I read headlines like this, I see "housing will become increasingly affordable over the next several decades."

    That's great news!

  • Report this Comment On December 23, 2011, at 5:19 PM, 20MalbecRoble05 wrote:

    I like the insight provided by Shiller's interview. Video is a great compliment to these well written articles.

    Yes, a house is a manufactured product just like an automobile. It is definitely a utility. (Utilities included!)

    I think what's missing in the analysis is the value relationship of the house+/-property quality+/-location location+/-technology=market value of a "home".

    In most parts of the world, location is the single most important factor in determining the market value of a house.

    I look forward to more interviews about the factors involved in housing prices. Could we expand further on these? Thanks!

  • Report this Comment On December 23, 2011, at 5:20 PM, MKArch wrote:

    I know this guy is supposed to be the ultimate guru on housing but he's clueless. Here's why housing for the vast majority of the population is the best investment they'll ever make:

    A. Contrary to Shiller's belief and many other Ivory tower academic types for almost every normal person in the country their home is not an investment it's a place to live.

    B. The same subset of almost all normal people in this country don't have the skills to be good investors. Even if the the average person was disciplined enough to pocket the difference between rent and mortgage (they're not and that difference has evaporated) and then invest it, chances are they'd lose money in the long run.

    C. A mortgage is also fixed and over the years even before the house is paid off the mortgage payment becomes less and less significant compared to rent that keeps going up. Heck right now in many parts of the country rent is more expensive than a mortgage payment on comparable properties.

    There's a good reason why common wisdom in this country is that owning a house is the best investment you can make. For the vast majority of the population it has been and always will be the truth. Considering just about all jobs in the construction of a house are domestic it's also one of the greatest opportunities to stimulate. It's no wonder stimulating this industry has been a staple of government policy.

    Discouraging home ownership would be one of the dumbest policy's this country could adopt. Sure everything in extremes is bad and we are paying for the extremes a few years ago but let's not get carried away here. BTW to Mr. Shiller I'm in the construction industry (my alias is a clue) there have been some improvements in efficiency over the years but don't bank on much more over the coming years. We've hit the point of diminishing returns on construction techniques. Size and complexity of a home is where the wiggle room is at in addition to cost of land.

  • Report this Comment On December 23, 2011, at 5:27 PM, TMFAleph1 wrote:

    Fascinating; now that's a real value-added opinion. Thanks, Morgan.

  • Report this Comment On December 23, 2011, at 5:36 PM, DJDynamicNC wrote:

    @MKArch - Those are all very solid points. While I'm certain that renting and investing the difference is a good strategy in my case (I live in one of the lowest-cost regions to rent in the nation), you're absolutely right that the same cannot be said for all people at all times.

    I do think we go too far in encouraging home ownership at the expense of renting - part of why rental prices keep climbing is that there is a lot of intertia pushing developers away from developing new rental space which would restore that balance - but I can see your point that we don't want to actively discourage it, either, at least not too far.

  • Report this Comment On December 23, 2011, at 6:27 PM, DoctorLewis4 wrote:

    Housing prices could very well go down. Then again they could go up. Hang on while I consult my crystal ball...

  • Report this Comment On December 23, 2011, at 6:35 PM, shamapant wrote:

    I really like that idea, homes are "just a manufactured good" and so we can expect home prices to go down, the idea that home prices are a good investment due to price INCREASES, seems a bit wacky. The value of a house should act the same way as an office building does on a balance sheet, it should depreciate. Of course, I am ignorant of the industry, but thats my novice take. I like his thoughts though.

  • Report this Comment On December 23, 2011, at 6:44 PM, TMFRhino wrote:

    Nice interview to watch, can't wait for more of them!

    -Eric

  • Report this Comment On December 23, 2011, at 6:50 PM, MKArch wrote:

    Here's another way to look at this. From the height of the housing bubble the average home prices have fallen ~30%. I think the worst markets have fallen around 50%. Unfortunately I don't know of any statistics on how investors have averaged over that time period but I would bet average losses are at least 30% and logically we know a lot of people lost everything or just about everything. Would it really have been better to have invested money during the housing bubble instead of buying a house?

  • Report this Comment On December 23, 2011, at 7:00 PM, FutureMonkey wrote:

    Well thanks so much for that fat lump of coal in my stocking Morgan!

    Realistically residential real estate investing is not something most of us should be doing to earn money or as an investment. Individually, we should spend on housing what we can afford to suit our needs and not anticipate that our home value will outperform inflation. I prefer owning to renting for personal reasons, not financial ones.

    As an owner of a gorgeous 1920's Arts and Crafts home, I can safely say thbttttttt to the idea of old or style of pre-war homes being worth less overtime than due to changes in quality or style of the "manufactured product" relative to homes built 20 years from now. If I owned a "crap box" bslapped together in 2006 with hgh sulfuric acid chinese drywall, in a cramped suburban development 1 hour commute from the closest job market that is identical to the 18 other houses crammed together on my block....well then Professor Schiller has an excellent point. Future homes are likely to be better constructed, with more energy efficient ammenities, and will hopefully not be quiet so hideously similar to each other. Of course in 1920's, Bungalow Heaven in Pasadena was consider tract housing --- gorgeous Craftsman tract housing, but still tract housing.

    Cheers Morgan! Happy Holidays

    FM

  • Report this Comment On December 23, 2011, at 9:41 PM, ivanhoe292 wrote:

    Spot on...MKArch,

    I've always payed close attention to Case-Shiller housing reports but seeing this has me wondering!

    A home just another manufactured thing? How about the automobile? Don't we have robots to reduce the cost of manufacturing and cheap components from overseas? Can you buy a car under $10,000? This was the cost of a house 60-65 years ago!

    Here's another thought...if housing isn't a cap-gains investment pay it off and free up cash for that investment instrument that is a cap-gain winner...you have to have a roof over your head.

  • Report this Comment On December 24, 2011, at 12:43 AM, Tomohawk52 wrote:

    It's a very interesting interview. I like to make the comparison with cars. How many people would want to drive a typical 1980 model car today? Aren't cars generally more comfortable, more fuel efficient, safer, with better bells and whistles now? Why should houses be any different, assuming we are measuring apples to apples? I don't know the cost of cars in dollar-adjusted terms today vs say 30 years ago, but I do remember as a kid that my parents could barely afford one car while nowadays a very healthy percentage of couples have two so presumably they are getting cheaper, no?

  • Report this Comment On December 24, 2011, at 1:03 AM, dwot wrote:

    Something that I think is really missing is the declining rate of population growth. As population growth declines there will still be new home built and people who want them will pay a premium for them, but I think we'll see a larger depreciation hit on the price of housing. Over priced dumps are over priced because of demand, not value and an astronomical rate of population growth for a long time has kept demand for dumps up for a long time.

  • Report this Comment On December 24, 2011, at 3:28 AM, dividendgrowth wrote:

    Typical dumb ass academic.

    People gotta have a roof over their head, and if rents get expensive enough people will buy.

    US population is growing nicely.

    US housing price/income ratio is ridiculously low compared to the rest of the world. It's 40% that of Germany, and 10-12% that of China. Therefore, American houses are ABSOLUTELY DIRT CHEAP.

    Buffett is of the same opinion. Do you guys believe in the 2nd richest man in the world or that clueless academic?

  • Report this Comment On December 24, 2011, at 7:24 AM, skypilot2005 wrote:

    Location is key.

    I guarantee you that over 10 years lake front property on average, will increase faster than the average “main street” investment except for possibly the US stock market. Including in the calculation the cost of property taxes and utilities.

    Also, quality of life has to be a consideration and the location and type of rental property.

    I didn’t watch the video out of principle because there wasn’t any text offered below it. But, I suspect you could use his arguments to live in a trailer park, as well.

    Sky Pilot

    Staying in his adobe

  • Report this Comment On December 24, 2011, at 10:05 AM, MoneyWorksforMe wrote:

    I think the three most important and overlooked statistics in terms of forecasting home prices, is unemployment, individual income, and college tuition costs.

    I am currently in the demographic that my parents, and those born during the baby boom era, began fervently searching for the most important purchase of their lives--a home.

    Neither me nor my friends, most of whom are around the same age, can realistically conceive of buying a home. We all hold good, steady jobs, but the starting salaries, bonuses, raises, and benefits we receive, are a mere fraction of what they were pre recession. I for one, in spite of hearing I'm doing an excellent job, working hard and acquiring many new skills, am going without both a raise and bonus this year. This is the third consecutive year that the vast majority of nearly 500 employees have gone without a bonus or salary increase. Fortunately for me, this is only my first year with this employer and business and business expectations have come a long way since my tenure.

    So what I'm getting at here, is that many people wonder why housing is still going down while the demographic most important to the housing market is suffering from stagnant income growth, lower starting salaries and skyrocketing tuition costs (debt). In my opinion, housing in many areas has to fall much further (at least another 20%) to reflect this new, very unfortunate reality. Demand simply cannot keep up with these prices. I will be saving as much as I can and *hopefully* making a down payment on a home that is considerably cheaper than today's prices over the next 3-5 years....

  • Report this Comment On December 24, 2011, at 10:47 AM, FoolishCR wrote:

    I'll take the other side. Much of a homes price is labor and profit for the builder. If the US tightens up the borders like all the canadites speak the the cheap labor of the last several decades will be limited. The builder will still make a profit. Manufactured homes and new styles have been around for decades and some make a lot of sense like the earth shelters but most people still wan the stick build homes. It seems that it hard to change.

    A home is much more than an investment.People will want all the new things for home but as now and in the past they will remodel homes to meet their wants.

    Buy a home today at 4% interest with little down sounds like a good idea.

    Let Dr. Shiller keep talking, I will keep buying homes and renting them.

  • Report this Comment On December 24, 2011, at 11:00 AM, MKArch wrote:

    It seems like the concept of a house as a manufactured product has gained some interest here. Just for the record houses have been "manufactured" for decades in this country. They are called modular homes. They're built in a factory setting and shipped in sections to a site with a field built foundation. Usually two sections for a one story dwelling and four for a two story dwelling. From what I understand the construction techniques in the factory are not much different than in the field.

    There may be some savings in cost and they are turned out much faster than a typical one off house. I would bet both of those advantages are erased on the scale of a large development where a half dozen or so house designs are built hundreds of times.

    I know there are constraints on the industry due to the logistics of shipping the modules. The factories have to be something like 100 miles from the final site and they can only travel on certain roads. I doubt Mr. Shillers fantasy of G.E. mass producing a large chunk of this countries housing stock in a few plants around the country is ever going to happen. Even if you could work around the logistics your not going to reduce housing down to a dozen designs some engineer at G.E. came up with. Even in the modular housing industry today they customize designs to suit their clients desires.

  • Report this Comment On December 24, 2011, at 11:50 AM, MKArch wrote:

    The car analogy is one that I've used in the past and a good one to compare the Ivory tower academics notion of housing to the real world. Since a cars value declines the second you sign on the dotted line and will keep declining until it hits zero no one would argue that the purchase of a car is an investment. But that doesn't mean that when someone buys a car they aren't trying to get the best deal possible.

    From what I can tell the Ivory tower academics have developed their notion of a home being an investment by surveying home owners. This is as opposed to just growing up among average people and observing their attitude toward their home. Anyone who would bother to take these surveys is probably predisposed to suggestion to begin with and I'm fairly sure the process of asking people about their views on a home as an investment is planting the idea that they should see their home as an investment.

    Then you get to what exactly does investment mean? I am fairly sure again that in the minds of the people taking these surveys investment means paying the best price for the size, style and location they want to be in. Just like their concept of buying a car. It's not about a proforma analysis of 30 years of mortgage payments vs. a lifetime of renting and investing the difference between rent and mortgage (while that difference lasts). It's about getting what you want and need for a fair price.

    As the old adage states depending on how you ask a question you can get any answer you want. IMO the Ivory tower academics are getting the answers they want. Growing up in the real world I don't ever remember discussions about the economics of a mortgage vs. renting and investing the difference. I doubt anyone I grew up with could do the analysis if they were inclined to consider it to begin with. Considering it would require knowing what's going to happen over the next 30 years I doubt even the Ivory tower academics could do it with any degree of accuracy or certainty. Some one who buys a house and keeps up with thier mortgage payments know what to expect in 30 year though.

  • Report this Comment On December 24, 2011, at 12:20 PM, TMFTomGardner wrote:

    I love this interview. I take exception to haranguing about "ivory tower academics" -- because one of my core values is curiosity. Most of my best ideas come when I'm open to a wide variety of viewpoints. It also keeps me on guard for where there are hidden agendas and biases creeping in.

    My primary takeaway is that it is best not to take an extreme view on the financial rewards oncoming from purchasing "a home."

    The default setting is to believe that returns from your real estate will beat treasuries and bonds, and get beaten out by equities. The conventional wisdom is that buying a house is a profitable endeavor.

    Against that, there is plenty of land to build on in the US, immigration laws may stifle population growth, and the massive amount of debt overhanging federal, state, local, corporate, and consumer heads suggests that the deleveraging is going to continue for years (particularly because it may not yet be clear to the above groups how important it is to live within their means).

    Given what we've been through, I suspect the answer is going to sit somewhere in the middle. Those who make a financial profit from their real estate will be those who:

    a) focus on location

    b) negotiate effectively

    c) manage renovations thoughtfully

    d) find honest maintenance help

    When you put all the factors together, I believe that the average Fool would do well to:

    a) not expect big returns from their real estate

    b) not buy more property than you need

    but c) expect that you will get positive long-term returns from a smart purchase today

    What is most obvious to me is that nothing is going to touch the long-term returns from being intelligently invested in equities. That can even mean simple investments in Vanguard funds at low expense with high tax efficiency. Of course, we favor direct investment in stocks or in performance-based mutual funds....but I believe that passive indexing will, without question, beat real estate investments in terms of monetary returns.

    Tom Gardner

  • Report this Comment On December 24, 2011, at 2:00 PM, MKArch wrote:

    Tom,

    I think Ivory tower academics is pretty tame and in my opinion accurate when describing the group out there that's come to the conclusion that average people judge the purchase of a home against alternatives like stocks and bonds.

    The long term returns from investing "intelligently" may be superior to anything else but do you really think the average person in this country has the skills or inclination to learn them to invest intelligently? How many average people do you think have heard of Vanguard funds let alone are capable of understanding it's fee and tax advantages compared to other investments?

    My guess is you will be tempted to use the success of your business selling investment advice to individual investors as proof that everyone has the skills to invest "intelligently". I would argue your services serve a small subset of the population already possessing some investing skills or inclined enough to learn them to pay for your service.

    As a long time member of Hidden Gems going back before the great recession I would point out the "H.G. pop" as strong evidence that even this subset is not all that skilled at investing "intelligently". A large segment of your service was obviously buying your recommendations without a clue as to what they were actually buying.

    IMO the vast majority of the population does not view the purchase of a home the way academics like Shiller believe they do and it's probably a good thing they don't. The thing that has made home ownership most people's best investment is the fact that it's idiot proof.

    From my real world experience the difference between rent and mortgage (while there is one) is mostly invested in something made in China not stocks or bonds. Even when it is invested in stocks and bonds most people will probably lose money over the long haul due to all of the psychological pit falls regularly discussed within the TMF community and elsewhere. Sure in theory renting and investing the savings (while it lasts) over a mortgage might be superior but in reality owning a home has always been and will always be the best investment most people ever made.

    Merry Christmas BTW!

  • Report this Comment On December 24, 2011, at 2:11 PM, TMFTomGardner wrote:

    I think we may just be defining the word "investment" differently, MK. I believe you are talking about the "non-monetary" side of investing. I think you are suggesting that if someone buys a $300,000 house, holds that house for 15 years, puts an addition on the house, pays the costs of maintaining the house, and ends up selling the house for $450,000...this can still be a very, very good investment for them. Netting out all fees, maybe their return on capital investment is 2 percent per year. And I believe you are saying that this is still likely to be the best investment people will ever make. Because, you are citing the non-financial rewards of owning a house.

    I am defining investment by looking purely at the financial returns. I believe that owning a Vanguard Total Market Index Fund, and adding to it each year, will yield a better return over the next 15 years than will most residential real estate investments. I also believe that doing so is easier than buying a home (taking on a mortgage, etc). Finally, I think the average Fool can easily grasp how to do this, and there are millions of people each month coming just through our site, learning just how to do that.

    I believe that, in the ideal, the average Fool would do well to buy a home that fits their needs, taking on a mortgage they are highly confident they can pay down (ideally, accelerating the paymets). Alongside this, they should put the bulk of their capital into passive indexing or thoughtful investing. Whether or not this thinking will reach beyond a niche is really just a challenge to our ability to reach people and to teach them the basics.

    Overall, we probably agree much more than we disagree here. I will close by giving a nod to Dr. Shiller, though. He has been pretty spot on over the past decade...when a lot of people around me seemed to think real estate was a shoe-in winner. I'm glad he gave us the interview.

    Happy holidays, Fool!

    Tom

  • Report this Comment On December 24, 2011, at 2:15 PM, TMFHousel wrote:

    <<I think Ivory tower academics is pretty tame and in my opinion accurate when describing the group out there that's come to the conclusion that average people judge the purchase of a home against alternatives like stocks and bonds.>>

    FWIW, a recent (2010) Fannie Mae survey showed 60% of home buyers cited "will make a good investment" as a major reason they bought a home, and another recent Zillow survey showed about half of potential homeowners think home prices will appreciate 7% a year going forward.

  • Report this Comment On December 24, 2011, at 2:45 PM, MKArch wrote:

    Morgan to Tom's point about defining "investment". Are these people saying it's a good investment compared to their expectations of a comparable investment in stocks and bonds over the next 30 years or are they saying it's a good investment because in their experience the core of retirement for most people they know is a paid off home (no rent or mortgage payments) social security and probably some sort of job even if only part time. Maybe a 401K plan or union pension replaces the need to work till they drop.

    I grew up the son of a union carpenter. About as middle class and average as you can get. I do have relatives that did well investing in stocks, bonds and mutual funds. I've had the conversations about the value of owing a home with family and friends over the years but I've never had a discussion about comparing rent to owning and the likely returns investing the difference. It's just a concept that doesn't ring true in the average middle class world I grew up in.

    I also make my living designing houses for people. I have conversations regarding the value of a house all the time but have yet to have a discussion with a client comparing home ownership to expected returns intelligently investing the difference between rent and a mortgage (while one lasts).

  • Report this Comment On December 24, 2011, at 3:01 PM, MKArch wrote:

    BTW I don't know if Shiller was in the negative equity death spiral camp but regarding predictions this is one that flopped as I predicted it would. It's become clear that after the flippers who actually did buy houses as investments were wiped out of the market the vast majority of people who own an underwater home are not defaulting as long as they can keep up with the payments (didn't lose their job).

    We don't have the death spiral of underwater home owners mailing in the keys further depressing home prices resulting in more under water homeowners in a death spiral where almost everyone with a significant mortgage eventually defaults. The reality is once we got passed the flippers most people are hanging on to their home if they can for exactly the reason I have been pointing out, it's a place to live not an investment. As I recall negative equity death spiral theory was predicated on a survey that indicated people would default on their homes if they were under water. I think the people who put the survey and study together got the results they wanted but not the truth.

  • Report this Comment On December 24, 2011, at 4:56 PM, duuude1 wrote:

    I've been a major fan of Shiller ever since he called the 2001-2 recession in his 2000 book "Irrational Exuberance":

    http://www.amazon.com/Irrational-Exuberance-Robert-J-Shiller...

    And then Shiller did it AGAIN by calling the 2007 housing bubble deflation in his 2005 2nd edition of the same book

    .

    Demeaning someone who holds a different opinion and skillset by calling them an academic (which he is certainly) means you'll miss out on some of the sharpest and most accurate opinions (which of course you have to filter like any data - there are as many dumb academics as dumb investment advisors or dumb engineers or dumb architects or dumb anythings...Shiller ain't dumb). Shiller's record speaks for itself. In my opinion, because of his performance when he speaks he should be listened to first and before anyone else on economic issues. The other reason is that he never speaks on things he is not qualified to comment on. So I trust him.

    Meanwhile... Everyone around me for the past decade, co-workers, relatives, blue- and white-collar, urged me to buy a house because it was the best way to get rich Rich RICH... so my experience is a respectful but direct refutation of MKArch's thesis - people were definitely in a gold rush mentality.

    I listened to Shiller instead of even the well-meaning relatives - and have never owned. I am still renting and am doing financially very well as a result - with fewer financial risks than any of my peers who have a home, most of whom are now underwater.

    The gold-rush mentality of buyers and unreasonably easy credit of lenders and investors combined with the misleading stories of "my grandpa bought his house for $20000" - stories that neglect to mention that grandpa's salary back then was $7000 (1/3 of the home price). People always forget the power of inflation... everyone should do a quick spreadsheet with 3% or 5% inflation to see what happens in 20, 30, 40 years - it's mindboggling.

    I do agree with MKArch that we definitely must not discourage home buying. But banks must make sure people only buy a home they can easily afford.

    And we need somehow (I hope not through regulation) get home prices DOWN much farther - they are still far above where they need to be in many places. In the locations where an average home is 3x an average workers annual income - life is good.

    Really good points and counterpoints here! Happy Holidays!

    Duuude1

  • Report this Comment On December 24, 2011, at 8:21 PM, Mikety wrote:

    Its a classic buy low now...and sell high come 2013/14....dont listen to that fool....look at asia afternthe 1997 crash....it has pick up and risen 5 folds.....may he is just short LEN! KBH ! DHI

  • Report this Comment On December 25, 2011, at 12:23 AM, Gungir wrote:

    I think it is difficult for people to come to grips with owning a home is owning an over supplied product in many areas of the nation. When the baby boomer generation starts to unload in volume, what do people will expect to happen? There is a lot of commentary about a house being potentially better than the stock market. That isn't the point. The point is whether owning a home or renting is the better choice. The fact is it depends on your employment and life decisions. The point about a home being an investment is somewhat ridiculous. The same people who would struggle with investing in the market so they buy a home are the same people who don't take into account all of the REAL costs of home ownership. The main reason to live in a home is that you have desire to do so. If you plan on living in the same location for an extended period it can make great sense.

    I think MKArch makes a great point with the original (3) that the cost stays roughly the same (minus taxes and repairs and remodels) while your yearly income increases with age (hopefully). The downside as an investment is obvious: in today's environment those who have paid for their house (like my parents) who have an interest in selling will take a dollar per dollar loss on investment to drop their price below what they paid off originally in 2001.

    I take no stock in the comment that now that we got rid of the house flipper band wagon things will improve. That ignores the economic weakness of the United States. Banks still have a huge amount of foreclosures to take care of and are still foreclosing left and right on people in many locations. The reason of course is that since they got their bailout they don't have the financial necessity to deal with underwater mortgagees as they would have without the bailout.

    I owned a home in Lansing, MI and sold summer of 2011. Prices have dropped 7% more since the sale and may not stabilize until summer of 2013 at this rate. That was a 35% loss. Given job opportunities, I took the loss simply because I would come out ahead in 3 years compared to staying. People I worked with who stuck around and lost their jobs now have a home with zero prospect of selling. A newer trend is people renting their homes and living in a small apartment to survive.

    I had an uncle in the building trade who passed some years back. He built houses for the average Joe and he built houses for actors and even a billionaire. He knew full well the ups and downs of the building trade. Just as investing in the market can be tricky, investing in a home can be difficult. You have to know consider many things when purchasing. You need to have an exit plan even if it is 40 years out. Right now the plan to own a home and simply sell it when you get older is struggling in many areas. How many near-retirees do you know that are holding on for a few more years due to investments like 401k's AND owning a house they cannot unload at a price they are willing to entertain?

    Attacking Shiller because you don't agree is fine but I think until we take care of our many fundamental financial issues in this nation that it is quite a glass is half-full mentality to say the things he stated as a possibility have zero probability. Of course I will give anyone on here a buck if they find anyone taking a short position on a market or a stock that doesn't royally piss someone off in the process. As my father-in law says, "No one likes to hear they are wrong!".

  • Report this Comment On December 25, 2011, at 12:28 AM, Merton123 wrote:

    The advice in the Talmud is to have 1/3 of your money in inventory, 1/3 in land, and 1/3 in cash. Updating the advice for today's world I would substitute Stock Market Index for inventory per Tom Gardner's ealier post.

    The price of real estate will always be subject to supply and demand. Buying depressed real estate in Miami today should be a good investment a decade from now. Unfortunately real estate tends to be lumpy, and requires a lot of personal attention unless one invests through a REIT. Also real estate in Cuba could be a good investment ten years from now. Again the reasons pro and con are the same as for Miami real estate.

  • Report this Comment On December 25, 2011, at 12:28 AM, TicoHombre wrote:

    The interview (and sadly most any discussion regarding housing in the U.S.) does not distinguish between locations. Housing issues get lumped together as if to say that what's happening in W. Virginia, Washington D.C., or San Francisco is happening in the South, or Central areas of the country. It isn't. I can buy rental houses which are immediately cash-flow positive, thus having the renter pay ALL ownership expenses and end up with a cash flowing asset. I then invest the cash into dividend-paying equities throwing off more cash which is reinvested thus producing a compounding monster. There is money to be made in real estate. Just don't count on it coming from your own home.

  • Report this Comment On December 25, 2011, at 11:34 AM, buffyflunny wrote:

    Merry Christmas, Fools!

    I think MKArch makes some very good points about how people reason about their investment in a home. My paraphrasing would be: they *don't* reason about their home as an investment. It is a place to live that eventually appreciates in value. For most of them, it is the only thing they will ever own that actually increases in value. Maybe (I hope) that will change over time, but I doubt it. The paraphrasing is mine, so my apologies if I have mischaracterized it.

    Unfortunately, as an investment, it is pretty bad. After you subtract out the costs of the house (don't forget the interest which will probably double that cost), and the costs of ownership (maintenance, taxes, etc) you'll probably just about break even. Of course, that

    assumes that house prices continue to rise over time. It is that assumption that has been called into question.

    I don't think calling that assumption into question is unreasonable for a couple reasons:

    1) Who will be the home buyers, and can they sustain the current prices?

    2) Who will be the home sellers, and how much equity do they have?

    The problems for the buyers is that in the current and foreseeable economy, buying power is on the wane. Until real wages start to rise and short term debt is retired, it's going to be difficult to raise enough capital to afford a sustainable mortgage at current prices. Part of this will also hinge on the rate at which rents increase.

    The problem for the sellers is what to do if you have negative equity. You either have to sit tight and wait for prices to stabilize and start moving up, eat the loss, or let the bank eat the loss. I suppose you could also try to go the land lord route and turn it into a rental property to generate some return on it.

    All of that conspires to reduce liquidity which is not good if you are on a short time frame. Personally, I think that continues to move prices down for some time to come yet.

    Now for folks with sufficient capital to enter the land lord game, right now is probably a great time to invest. Home prices (capital requirements) are going down, rents (revenue) are going up. Good gig, if you can get it.

    As to the criticisms that these analyses don't take location into account, that is probably correct at some level. This sounds much more like a macro analysis which will treat the data in aggregate so those effects will be averaged into the larger numbers. That doesn't change the accuracy of the prediction. But it does require us to think statistically which means (among other things) what applies at the population level does not apply to a point, and what applies at a point does not apply to the population.

  • Report this Comment On December 25, 2011, at 3:20 PM, TMFTypeoh wrote:

    Morgan,

    Nice video! Hope you are enjoying your new life as a professional interviewer!

    I do think that "housing" in general could stagnate for a long while. However, we all know that each market is unique.

    Anyone think that manhattan or san francisco real estate is not going to appreciate faster than inflation? I sure do.

    How about, say, tulsa OK? Not so much.

    As long as there are barriers to building more of the same (i.e., water, city limits, good schools/bad schools, growing city), I think some real estate will appreciate faster than inflation.

    Any "generic" housing, where land isn't an issue and you can crank new houses out over and over......i think those areas have a problem.

  • Report this Comment On December 25, 2011, at 6:15 PM, wasmick wrote:

    Homes have historically appreciated at a fairly low rate, 2% to 4% over the past 100 years or so.

    Of course, those numbers and time frames can be sliced and diced to show pretty much whatever premise you want to support.

    FIrst and foremost, Schiller - like the first replier to this article - are ultimately looking to sell you something. Both make definitive declarations in the face of unknown circumstances and if that isn't warning enough to read (or listen to) them critically and keep your hand on your wallet at all times while doing so...then you'll get what you deserve.

  • Report this Comment On December 25, 2011, at 6:29 PM, ThePoulTrend wrote:

    It may not be a Dividend maker for you, but personally I believe buying a home is one of the smartest things to do. Especially in the times we are in right now. If you have the opportunity to, make the investment, just take the time to look around at all of your options. Homes are now more affordable, and with the interest rates so low, it would be wise to get in now then later. If I had the money I would buy a house. I was someone who rented out in a mid level community, 975 square feet ran me and my 2 roommates $1333.00 a MONTH, and this was 2 years ago. I cannot imagine the cost for that spot now. That is close to $16,000 a Year. If I were to rent for 5 years, it would cost me upwards of $80,000.00, now if I bought a home for 100,000.00 with a 15-20% down payment it would run me close to 15,000.00 to 20,000.00 for the initial payment, than with a 20-30 year loan, my payment including property taxes could run me $600-$700 a month a most which was half what my rent used to be.

  • Report this Comment On December 26, 2011, at 3:03 AM, richardrollo wrote:

    Home prices in the next several years will depend on what happens with the shadow inventory of non productive but not foreclosed properties on the books. They will also depend on what shape the credit markets are in and whether or not prospective buyers have the income and the confidence to buy homes. If the overall economy does not improve, neither will the housing market. Real estate can be a very bad investment in deflationary periods but a good investment in inflationary times. What Prof. Schiller says about the house is true of the physical house, but there are other factors in the price such as location of the land, neighborhood, schools, parks, and many others. I would say though he might be right about the house flippers. Unless there is another boom like the last several years, there won't be much action for the house flippers.

  • Report this Comment On December 26, 2011, at 6:51 AM, skypilot2005 wrote:

    On December 24, 2011, at 12:20 PM, TMFTomG wrote:

    On December 24, 2011, at 2:11 PM, TMFTomG wrote:

    Tom,

    First, I would like to thank you for the complimentary Rule Your Retirement subscription I received when I renewed my Stock Advisor membership, recently. I appreciate it and will use the information from it. What do I need to buy to get one of those “Fool Hats”? :)

    I think I missed anyone’s factoring in the cost of renting during retirement verses living in a paid off home you own with no mortgage payment. Yes, you will have insurance and taxes to pay but, they will be much less than the cost of renting a comparable residence.

    For example:

    I pay around $7,000 per year in property taxes on my primary residence. About $2000 I think, for home owner’s insurance.

    $9,000 per year = $750 per month.

    I don’t know what it would cost to rent a comparable home close by. We are within 10 miles of a college town and I think 50 – 60 year old homes a lot smaller are renting for $4 – 5,000 per month.

    Very small lots built close together.

    For an example’s sake, let’s low ball it and say, I can rent for $3,000. per month.

    $3,000 - $750 = $2,250 per month difference.

    All things being equal, I am assuming utility expenses would be the same.

    Quality of life issues aside, the proponents of renting vs buying a home have a big hill to climb.

    I will have needed to save and invest an amount that will deliver an extra $2,250 income, per month in retirement.

    Did I miss something? I am only on my 2nd cup of coffee….

    Fool On.

    Sky Pilot

  • Report this Comment On December 26, 2011, at 6:57 AM, skypilot2005 wrote:

    One more thing. In the above scenario, if I rent there will be nothing left to pass on in my estate to my survivors.

    Although, I guess you could say the investments generating income vs a home. But, they may be taxed different verses the proceeds from selling a home....

    Just another thought.

    Fool On.

    Sky Pilot

  • Report this Comment On December 26, 2011, at 9:21 AM, MKArch wrote:

    Tom,

    If you are still out there I am not using the appreciation over time of the market value of the home as the basis of my argument that it's a great investment for most people. IMO price appreciation is a slight benefit at best mostly a wash as it's only ever going to matter if someone sells and buys something cheaper.

    My argument is basically forced savings. The real benefit to home ownership is not having to make shelter payments for 1-2-3 decades in the latter years of life. I don't know what variables the proponents of renting over owning a home are using to come to this conclusion but one big one they must be making that is not realistic for most people is that they will be disciplined enough to pocket the difference between renting and owning (while there is a difference) and wisely investing that money. My guess is they are also not accounting for the benefit of years of no shelter payments after paying off the mortgage or the years where the mortgage is substantially less than rent.

    That's the basis of my argument that owning a home in the real world has been and always will be the best investment most people ever make. I don't know what the ROIC on Social Security is but my guess is it doesn't beat the theoretical returns from investing the same money yourself. Do you advocate scrapping Social Security and assuming everyone will be disciplined enough to invest the same money and then skilled enough to invest it intelligently?

    One last point regarding TMF services. I hope I did not come across as diminishing the value of the various services. Most of my investing skills were developed over years of asking questions of the analyst and knowledgeable members of the H.G. community. My top 1% CAPS ranking is a testament to H.G. That being said your mission statement of making everyone who subscribes a successful disciplined valuation oriented investor is not realistic. You do help many if not everyone and in reality that's admirable enough.

    Mike

  • Report this Comment On December 26, 2011, at 10:48 AM, ncfool wrote:

    Fantastic discussion!

  • Report this Comment On December 26, 2011, at 12:32 PM, TMFTomGardner wrote:

    Mike,

    I have no doubts about your Foolishness. :) You make some compelling arguments. The #1 argument is that a mortgage forces savings. That is very, very valuable thing in a free market like ours where consumers have received a subpar education (particularly as regards finances). Forced savings is a blessing.

    I think what we have here is Dr Shiller dealing in a theoretical world -- where home values may remain flat for a long time still, where index equity funds will outperform real estate, where the mathematics look pretty clear as to how to optimize long-term outcomes.

    You, however, are dealing in the real world, where the average person knows very little about index funds, knows very little about how to score the real returns on their real estate, and has not developed the discipline of saving. In this real world, buying a home is a very, very smart move.

    For what it's worth, I am a *strong* proponent of buying a home. My only recommendation is that people buy what amount of home they'll truly need, pocket the savings, invest that savings Foolishly, and then spend a few hours a month calling your elected representatives pleading with them to better regulate the banking system (lest we all suffer).

    A pleasure exchanging ideas, Fool.

    Tom

  • Report this Comment On December 26, 2011, at 3:08 PM, Seanickson wrote:

    I have tremendous respect for Dr. Shiller and pay very close attention to what he says. However, I disagree with him here. I don't foresee a situation where the cost to build a home declines enough to make a meaningful difference in costs and rents.

    Ultimately, the price of a home has to be at least partly determined by the rent that people are willing to pay to live there. If you purchase a home at 10-12 times annual rent as is very possible in some areas and do your due diligence with tenants and maintenance, you can earn a good return on your investment. If Dr. Shiller is right and home prices do continue to decline, then that only equals a higher return on your next investment.

  • Report this Comment On December 26, 2011, at 3:19 PM, TMFHousel wrote:

    <<I don't foresee a situation where the cost to build a home declines enough to make a meaningful difference in costs and rents.>>

    Interesting to ask: Did they foresee the decline coming in 1900?

  • Report this Comment On December 26, 2011, at 3:43 PM, MKArch wrote:

    We are in 100% agreement now Tom. I can give you some real world insight into how people determine how much house to buy. They start out with an idea about how many sq. ft. beds baths amenities etc.. Then they go to a bank and learn how much they qualify to borrow and based on shopping around the existing home or development market they get an idea of how realistic their wish list is. When they are looking at something more custom where I come in they usually have a conversation with a builder or myself or both about how much house they can get for what the bank will lend them. If their wish list was on the optimistic side they adjust or maybe pass.

    Obviously the key to the excesses of the recent bubble were based on banks lending money they shouldn't have. IMO the "investors" that the banks we're selling MBS to, because they couldn't get enough of them were the biggest problem and deserve to have a light shown upon them. In any case I don't think we'll have to worry about banks writing stupid mortgages for a long time. That should solve the problem of people taking out mortgages they can't afford.

    Mike

  • Report this Comment On December 26, 2011, at 3:58 PM, MKArch wrote:

    Morgan,

    Things have changed a lot since 1900. As I pointed out in an earlier post the concept of "manufacturing" a house that Shiller seems to be banking on to drive the cost of a house down isn't a novel idea. We've been doing it for decades in this country. It's called modular building. There are some serious logistical concerns as well as psychological that limit this form of housing.

    The reason why manufactured housing isn't a larger portion of the total market in this country isn't because no one thought of it. It's primarily logistical and also psychological. Trust me Lennar would be setting up regional housing factories in key parts of the country if that was the cheapest way to produce a house.

  • Report this Comment On December 26, 2011, at 4:44 PM, MKArch wrote:

    O.K. this thread has me going so one more real word insight. I'll date myself a little bit in telling you I got started in the profession of architecture in the mid 1980's out of high school. I'd say the average home size back then was 1,500 s.f. to 2,000 s.f. At least in the area I grew up in (South Jersey). By the height of the housing bubble I'd say the average was maybe 2,500 to 3,000 s.f.

    I own some LEN and following their conference calls I know they are cutting back on home sizes and amenities in order to compete in the current market. One interesting point made a while ago was they were having success renegotiating approvals to get higher densities in their developments. Land is also a lot cheaper today than it was a few years ago.

    Cheaper home prices are already here. Particularly when you factor in interest rates. There is no revolution in construction methods necessary. I'm a Jim Chanos fan and if he's right about China like I think he is, construction materials will probably be getting a whole lot cheaper soon as well.

  • Report this Comment On December 26, 2011, at 7:34 PM, sjankins wrote:

    Home prices still have a ways to fall. How much exactly is difficult to say but current market conditions will only worsen.

    As inflationary pressures rise in the 3-5 years due to our massive Gov't debt and extensive quantitative easing then interest rates will be forced significantly higher making mortgages far less attractive. This will decrease the demand for home purchasing and drive prices even lower. More homeowners with variable rate mortgages will default as rate rises lead to even more foreclosures, increasing supply of homes further.

    Takeaway: higher supply of homes combined with a decline in demand = lower prices.

  • Report this Comment On December 26, 2011, at 8:23 PM, kyleleeh wrote:

    Mike

    You keep pointing out that nobody you know talks about renting and investing the difference vs owning. It seems like your point is that if most people don't realize something is a bad investment then it isn't. Just because most people don't know that renting and investing the difference will net them more money does not mean that it isn't the best choice...if you didn't know about a 3-for-1 deal at the store that doesn't mean the 2-for-1 deal was better, it just means you were misinformed about your options.

    The author never stated that most people know this information...in fact our current recession is a testament to the fact that most people don't know this.

    The Fool is here to educate not to tell perpetuate ignorance. I don't think you're doing anyone a service by arguing that most people are bad investors so they should be in bad investments.

  • Report this Comment On December 26, 2011, at 8:39 PM, MKArch wrote:

    SJ,

    *NEW* home inventories are at an all time low of ~0.165M units in a land of ~120M homes. This is due to all time unprecedented in the history of housing statics low numbers of new homes built for the last three years. The long term average new home starts over about the last 50 years was ~1.5M/ year. This follows population increases both natural and immigration. At the height of the bubble housing starts hit ~2.2M and averaged around 2M/ year.

    For a frame of reference total home sales per year average something like 5M-6M with the new home market accounting for something like 15% of the total market and existing homes making up the bulk of sales. While we certainly built more homes than necessary in the bubble years the housing bubble was primarily about irrational prices for land and homes not supply of homes.

    On the demand side the seller of an existing home whether foreclosed or not needs some place to live. Right now kids putting off leaving the nest and some moving back in or shacking up etc is keeping demand down but this is not a sustainable trend. Even with this trend existing home inventory is slowly declining and new home inventory as I've pointed out is at all time lows.

    Here's another interesting frame of reference to put demand in perspective. In the decade of the 90's which started out with low demand due to another nasty housing related recession we built about 14.5M houses. In the decade of the 00's due to the collapse of construction at the end of the decade we built almost the exact same ~14.5M houses. So far in the current decade we are on a pace to build ~5.5M houses. In reality we'll build around 14M or so houses to meet population growth although the number will be back end loaded the way we are going now.

    One last point people get confused about. Rented and leased housing does not build itself so whether more of the population opts not to own going forward than did in the past does not change demand for housing construction anyway. It will drive up the cost of renting as is evident right now. The dynamics of housing are a lot more complex than government debt and quantitative easing. People have to live somewhere.

  • Report this Comment On December 26, 2011, at 9:03 PM, MKArch wrote:

    kyl,

    There is a group of people like Mr. Shilling who truly believe in this argument about the returns pocketing the savings of renting instead of owning and investing it wisely being superior to owning a home. Due to the collapse of home prices over the last few years they're arguments are being taken somewhat seriously now and many are advocating policy that would encourage more people to rent than own a home like doing away with mortgage interest deduction.

    My argument isn't that in theory returns from investing the difference between rent and a mortgage can't beat the price appreciation of a home. My argument is that in reality most will pocket little to none of the difference (while there is one) and what they do invest will probably be done poorly. The result will be a financial disaster for most people who were pushed into renting instead of owning. You would have the poster child for unintended consequences.

    I'm not even sure if the returns from pocketing the saving of renting while rent is cheaper and wisely investing it really would beat the *total* returns of home ownership. It doesn't sound like the proponents of this are accounting for the years of not having to make shelter payments vs. inflation adjusted rent or the years when the fixed mortgage payments are less than rent payments due to inflation. It would be interesting to have Morgan or someone else comment on what assumptions go into this argument.

  • Report this Comment On December 26, 2011, at 9:33 PM, MKArch wrote:

    Oops forgot to add to my housing stats that new home starts over the last three years have been a dismal 0.5M-0.6M/ year vs. the 50 year average of 1.5M/ year. They were only a lousy 0.8M in 2008.

  • Report this Comment On December 26, 2011, at 9:47 PM, TMFHousel wrote:

    <<There is a group of people like Mr. Shilling who truly believe in this argument about the returns pocketing the savings of renting instead of owning and investing it wisely being superior to owning a home.>>

    I'm not sure Shiller has ever made this argument. He advises owning a home if it puts you in a neighborhood you like, close to schools you like, next to friends whose company you enjoy, etc. He's simply against the argument of owning a home as a way to become wealthy. And he's not spouting off some crazy theory. He's looking at what happened over the last 100+ years of history.

  • Report this Comment On December 26, 2011, at 9:51 PM, kyleleeh wrote:

    Mike

    If someone decides to rent an apartment for $1000 a month instead of buying a median priced home with a $1500 a month mortgage (prices based on my area) and they put the $500 a month difference into ANY s&p index fund after 30 years that person will have a chunk of cash big enough to buy a retirement home outright and still have enough left over for a comfortable living. If that person had bought the home they would have a bunch of equity that they can't access without selling the home or doing a reverse mortgage, and a much smaller pot of cash generating assets to live off of. So your argument of not having to pay cost of living if you buy is not really true...the investor will end up with more then enough cash to buy, and retire.

    One of the many reasons the rich keep getting richer and the poor keep getting poorer is because the poor have been brainwashed into thinking that owning real estate equity is the path to prosperity while the rich know that assets that generate cash flow are the real path to wealth.

    Again The Fool seeks to educate people as to what the best investment options are, not to treat them like sheep who should choose the lesser of two investment strategies because they aren't smart enough to know the difference.

  • Report this Comment On December 26, 2011, at 10:32 PM, MKArch wrote:

    Morgan,

    I can't say I follow Shiller closely so I could be mistaken about where he stands on home ownership but from the video it sounded like he was in the more people should be renting camp.

    I only watched the video once so maybe again I missed something but from what I remember the 100 year history lesson was based on the price appreciation of a home or depreciation as I think was pointed out in the video. It didn't seem to be accounting for the years of no shelter payments that IMO are the basis of the common wisdom of the value of home ownership.

    Thinking about this some more I guess if he were right about prices declining over the long haul someone would do well if they waited until retirement to buy a house but that's a pretty risky bet IMO. Particularly when he assumes some sort of evolution toward mass production of housing will be the reason for dramatic price declines. IMO this is naive and again a risky bet.

    kyl,

    Help me out with your assumptions, how long will rent be cheaper than a mortgage and what will the S&P 500 return over the next 30 years? Hopefully it's better than the last decade. What will an average home cost in 30 years? How do you account for mortgage interest and property tax deductions? Again none of this deals with my main issue of how realistic is it to expect people to be disciplined enough to pocket the difference between rent and mortgage (while one lasts).

  • Report this Comment On December 26, 2011, at 10:41 PM, MKArch wrote:

    BTW kyl you miss the point of my issue with Shiller again. I'm not arguing someone sophisticated enough to understand his arguments about the long term trends in home prices couldn't do well renting instead of owning. My concern is Mr. Shiller is a very influential person on matters regarding housing and if he is in the camp advocating policy that would discourage home ownership and such policies were adopted the reality is this policy would likely result in a financial catastrophe for most people who were pushed into renting instead of owning.

  • Report this Comment On December 26, 2011, at 10:48 PM, kyleleeh wrote:

    Rent will go up over time but with a head start on investing your Net assets will be larger in the end. Interest deductions go down over time as the loan is paid off, and deducting the tax paid on your property does not come close to making up for the property tax itself.

    The person who puts it all in a mortgage instead of investing early has to wait for their income to grow before investing. If you want to look at income growth over the last 30 years vs the S&P return over the last 30 years, I'll take the S&P any day. Same for comparing the S&P to the Shiller/Case index.

    Weather or not someone is disciplined enough to do that is something they have to figure out, this website just lays out the facts and opinions for them to use in their decision. Your correct that many people will not be able to do that...but should we not even let them know what the best option is because you don't think they can handle it?

    I don't

  • Report this Comment On December 26, 2011, at 10:52 PM, kyleleeh wrote:

    Also I don't think it would be a catastrophe at all, people would much better off with assets that will generate cash flow when they need it then with a home that will consume cash flow when they don't have it.

  • Report this Comment On December 26, 2011, at 11:21 PM, MKArch wrote:

    Rent is already more than a mortgage for a similar property in many parts of the country and the current shift toward renting vs. owning is driving the cost of renting up as we speak. How can you be so sure net assets will be larger in the end?

    Once again my real issue isn't with Mr. Shiller writing about the long term trends in housing. My concern is if he were advocating public policy that was aimed at discouraging home ownership.

    Money invested in stocks bonds or mutual funds will generate cash flows but money invested in consumer electronics and fancier cars doesn't generate cash flows.

  • Report this Comment On December 26, 2011, at 11:25 PM, MKArch wrote:

    BTW renters are paying property taxes albeit indirectly but not receiving the deduction.

  • Report this Comment On December 27, 2011, at 12:02 AM, kyleleeh wrote:

    If living in a large house is that important to someone then both Shiller and I agree with you that buying would be better then renting a comparably large house. But as the author points out 60% of people buy a home because they think it is good investment when it's really not.

    If a good investment is what you want, rent a cheaper apartment and invest your money in cash generating assets. If a white picket fence and backyard with no landlord is what you want then by all means buy a house...but don't expect to get much wealth out of it.

    You keep saying you're concerned about Shiller discouraging home ownership, but also that you don't think most people are sophisticated enough to be good inverters if they decided to rent instead of buying. I think these are complete contradictions...most people have never even heard of Robert Schiller or the Case/Shiller index. He is only going to be followed by people serious about investing.

    Still even if someone isn't a very good investor I still think all the information should be made available to them. We shouldn't lie to the public and tell them owning a home is the best investment you will ever make when all the data points to the opposite.

  • Report this Comment On December 27, 2011, at 12:25 AM, MKArch wrote:

    One more for the night kyl. I don't think the average persons definition of a house being a good investment is the same as yours or Shillings. To the average person getting to a point in life where you have no shelter payments is what makes housing a good investment not comparing it to their expected returns if they rented and invested the difference.

    Once again I don't have a problem with Shilling advocating someone sophisticated enough to understand his arguments rent instead of own. My concern is he sounded like he was part of the crowd that wants to create public policy that would force a lot of people not sophisticated enough to understand this into renting. IMO this would hurt a lot of people badly. I agree these people don't know who Shilling is let alone saw his video but if he is influential enough to potentially shape public policy and if that happens it doesn't matter if these people ever heard of him.

  • Report this Comment On December 27, 2011, at 12:46 AM, kyleleeh wrote:

    I'll give you one last one for the night also.

    Advocating a public policy that people should buy homes already did get a lot of people hurt badly, because it convinced people to who were not sophisticated enough to be homeowners to buy houses.

    Giving people accurate investing information is the best public policy IMO, and that's what Shiller and the author did here.

  • Report this Comment On December 27, 2011, at 2:59 AM, defamous01 wrote:

    Come on guys, its still early here and I'm now at the end of the posts.

    Keep on blogging fools, we need more fodder.

  • Report this Comment On December 27, 2011, at 6:42 AM, brazilianmac wrote:

    Ownership vs Rent of your primary house truly depend on what your plans are, it is not a financial or capital investment decision (if you are 1000% sure to have the money to purchase the house and pay for the mortgage if not rent!!!); I am near 60 and I will purchase my next house, I am planning to live in it the rest of my life and if I purchase:

    1st) I can modify it to be exactly what I want

    2nd) In case of a personal unforeseable disaster I will always have somewhere where to live.

    Till now I lived in rented houses, my life style has been hectic averaging an house moving every 3 years, it did not make any sense to purchase.

    When you consider an house has an investment you

    start to get into trouble, I do not mean that houses are bad investements (I will shortly purchase a small condo in Miami to diversify) simply that they are investments that have an high maintenance cost and to deinvest may be very difficult.

    We do not truly know how much building an house will cost in the future (my guess is that it will decrease not because of new technologies but of lower manpower cost) or what improvements in technologies for houses there would be (likely more green), but these are not the main future trend. Telecommute, more advanced comunication methods, electronic presence etc.. technologies move a lot of people to small town, this will be the change that will influence long term trends

  • Report this Comment On December 27, 2011, at 9:23 AM, jerr1 wrote:

    If you beleive all that you read an hear ill sell ya golden gate bridge. Old saying seeing is believing,we liv in time of great deception where countrys are over thrown by little as a suggestive remark. Beleiving is based on facts ,reason number 1 for housing bubble was not to raise home values but to increase taxs on those homes thru county an school taxs.Both of which hasnt come down with supppose falling home values. Unless goverment going to do a reaccessment of home values wont come down .Good news is income will go up soon so look for better job coming soon better pay

  • Report this Comment On December 27, 2011, at 10:26 AM, VoiceintheCrowd wrote:

    I second kyleleeh's point above regarding the fact that people not knowing an investment is bad doesn't make the investment good. Also, I think that MKArch's suggestion that "the thing that has made home ownership most people's best investment is the fact that it's idiot proof" is strongly belied by recent events and by my own professional experience as a professional in the bankruptcy, insolvency, restructuring, and distressed debt field. It is not a forced-savings mechanism. Second mortgages and HELOCs allow people to cash out any equity they've built. Interest-only mortgages allow people to simply never build up equity in the first place, at least for several years (after which many will say that they planned to move and get a second interest-only mortgage). Therefore, it is not an idiot-proof forced savings mechanism.

    On the personal finance front: Subsumed within my rent are the equivalent of property taxes, HOA fees, maintenance expenses, water, sewer, and trash. I live in a midsize Rust Belt city where both renting and owning are fairly inexpensive, but that means that those other expenses add up to a very large portion of the rent (more than half, by my best estimates of comparable maintenance costs and HOA fees). The interest on a mortgage would likewise be a sunk cost not going into equity. When I take all those costs out, I'm left with a figure that is easily worth it to me to avoid the responsibilities of homeownership.

    On the public policy front, I'm absolutely in the camp advocating getting rid of the mortgage interest tax deduction and the state and local tax deduction (which would include property taxes). These policies overincentivize homeownership, and worse, the mortgage interest deduction actually subsidizes interest, not equity. Given the status quo, this would "encourage" renting, but only by restoring a level playing field rather than one stacked in favor of owning instead of renting.

    I may well end up purchasing a home at some point. That will be a lifestyle decision, not an investment decision. I may want more space and to get into a better school district, if kids enter the picture. I'm not going into any deal thinking about how much I'll get back when I sell the house or what it will be worth to my heirs, however. That would tempt me to overpay, a temptation I intend to resist, and encourage others to resist as well.

  • Report this Comment On December 27, 2011, at 11:00 AM, easterninvestor wrote:

    i think purchasing a home can be an investment - an investment tool like a stock but the key is a long term strategy. short term owning comes with risk & timing the market...much more difficult to do. flipping homes is where people get into trouble, its a game of musical chairs and one day your the one without a chair. Location is really the key here too. in places like NYC the rents are so high that owning long term is a positive because housing stock is limited. owning is some town that was overbuilt during the bubble & now there are no jobs is not a good investment. you have to screen real estate like a good company, look at the underpinnings of the location. and don't assume you will get RICH RICH RICH....

  • Report this Comment On December 27, 2011, at 11:50 AM, arizonamike303 wrote:

    You mean I can't sell my house for 20x what I paid for it like my dad did?

    Well that certainly sucks.

  • Report this Comment On December 27, 2011, at 1:54 PM, MKArch wrote:

    O.K. I can't resist.

    Kyl I'm sure you will disagree and we will have to agree to disagree but I don't think flippers who had to mail in the keys when they realized their investment was a loser and people who never should have gotten a mortgage in the fist place living in a home they didn't deserve for a couple of years is the equivalent of reaching your retirement years saddled with $25K-$30K/ year and rising shelter payment instead on no shelter payments. Even responsible owners who just run into bad luck can probably arrange a short sale if need be. Not the same in my book.

    VOIC,

    You've got me owning a home is not idiot proof. Just like winning the pick 6 lotto, becoming a rock star or an all pro quarterback in the NFL are not idiot proof retirement plans. Do you really think someone who maxed out their home equity to build a home theater and buy matching his and hers Humvees would have pocketed the difference between rent and a mortgage and invested it wisely if they were renters?

  • Report this Comment On December 27, 2011, at 2:13 PM, VoiceintheCrowd wrote:

    MKArch:

    No, I don't think that. However, you were suggesting that the converse is true--we should encourage homeownership for essentially paternalistic reasons, i.e., that almost everyone should be presumed insufficiently sophisticated to do well in the market, and should therefore be encouraged to invest in their houses instead (even though empirically, that is very likely to be a bad financial decision). That is foolish, not Foolish.

  • Report this Comment On December 27, 2011, at 2:58 PM, MKArch wrote:

    Encouraging home ownership does not preclude someone sophisticated enough to understand the potential benefits of renting and investing the savings over a mortgage from doing so. This is a red herring. Pushing people into rent instead of owning and just expecting they'll be disciplined enough to pocket the difference and invest it wisely is naive and bad policy IMO.

  • Report this Comment On December 27, 2011, at 3:03 PM, TMFHousel wrote:

    <<Pushing people into rent instead of owning and just expecting they'll be disciplined enough to pocket the difference and invest it wisely is naive and bad policy IMO.>>

    Has anyone recommended this?

  • Report this Comment On December 27, 2011, at 3:53 PM, MKArch wrote:

    Yes I've seen arguments that more people should be renting instead of owning fairly regularly over the last few years. Doing away with mortgage interest deduction to decrease the incentive to own is an idea floated around. Debates about whether we've gone to far in squeezing people out of the mortgage market lately seem to illicit calls for even tighter standards because we'd be doing people a favor by keeping them from getting mortgages. I don't know of every proposal out there but I do see arguments that we should be implementing policy to shift more people to renting.

  • Report this Comment On December 27, 2011, at 4:08 PM, DJDynamicNC wrote:

    @MKarch - it's not so much pushing people into renting over owning as cutting back on pushing people into owning over renting.

  • Report this Comment On December 27, 2011, at 4:11 PM, MKArch wrote:

    BTW Morgan, I am getting the sense that the discussion with you is trending toward the personal side because some of my comments about Prof Shilling were less than respectful. If it helps I appologize to you and Prof. Shilling. I meant them more for effect and didn't think anyone cared what I said but it seems I have offended you and maybe Prof. Shilling so I am sorry.

  • Report this Comment On December 27, 2011, at 4:16 PM, TMFHousel wrote:

    ^Ha, no problem. 4 years and 1500 articles in and it's hard for comments to get too far under my skin anymore. Appreciate the discussion!

  • Report this Comment On December 27, 2011, at 4:18 PM, TMFHousel wrote:

    Agree with DJ though. The elimination of a subsidy (like mortgage interest deduction) is bringing the playing field back to par, not forcing it in any particular direction.

  • Report this Comment On December 27, 2011, at 4:22 PM, MKArch wrote:

    O.K. Morgan I'm glad I didn't do any damage. I've beat this one way past death already so I'll just see you on a future article that get's me going.

  • Report this Comment On December 27, 2011, at 4:47 PM, TheDumbMoney wrote:

    Typeoh wrote:

    "As long as there are barriers to building more of the same (i.e., water, city limits, good schools/bad schools, growing city), I think some real estate will appreciate faster than inflation."

    I think this is true to a point. But I think that at least theoretically, at a certain point these barriers, which are often artificial (building height limits, other zoning size limits, restrictions on building new apartment buildings, etc.) as well as natural, can make a place so expensive or otherwise unappealing that it eventually stifles a lot growth. (NYC is somewhat immune to this, because its great engine is still finance, which does not require tons of physical space.) I also think many such places, like Los Angeles (where I live) which are chockablock full of Baby Boomers, who just LURVE things like building height restrictions and other anti-development zoning regulations, are going to be in for a surprise soon when Boomers start to think about selling/retiring, or switching to a home without two stories, and find there are not as many people as they thought who are willing and/or able to buy their (speaking of LA now) 3bd/2bd homes on 8K s/ft lots that are theoretically worth $1 million or more. We shall see though.

    Even NYC seems to go through such cycles: it gets so expensive all the families leave because they don't want to spend 8x their income for a 1bd apartment, then it turns into a sh!thole, then flappers/hippies/artists/hipsters return to the now-cheap sh!tholes, renovate and buy antiques, eventually get gray hair and have kids, and the circle of life repeats. I'm joking a bit, but only partially.

    Separately, I enjoyed skimming the discussion above!

    DTAF

  • Report this Comment On December 27, 2011, at 6:24 PM, boshmontro wrote:

    What CRAP!

    This is purely Over Analyzing something. I will make this as short as possible. I have been in approximately 300 homes a year and talked to these home owners for the last 30 years. That’s about 9000 homes & a few less families due to some being vacant. He talks about turn of the century hand crafted homes being more expensive (not to mention much larger) than your little matchbox 1950’s War Homes where prices went down. It doesn’t take a rocket scientist to figure that one out. At the end of WWII you had a huge demand for housing by people that had little to no money coming back from the war. Thus, the invention of the war home. Today you do have a similar situation with less McMansion’s being built due to people downsizing and reducing their debt with smaller more energy efficient homes. Again, a no brainer.

    What people may or may not realize, the Real Estate Industry is the largest Industry in the US and also noted our economy is 70% consumer based. I wont get into how homes depreciate like cars & with improvements you can slow that down or a house can be used as a rental for income etc. I will say that until the Real Estate Market bottoms and stabilizes, our economy will suffer. Regardless, people due and many times have to tap into the equity of their homes to consume.

    In summary, to build a house tomorrow will always be more expensive than today. You just can’t get around the building components becoming more expensive. Now he does indicate with the invention of cheaper processes. Ok, I’ll concede an all PVC molded dwelling probably would be cheaper but yuk, no charm therefore the older homes again will be more expensive. Older homes (just like cars) is where you get more bang for your buck currently due to depreciation in many areas of the Country. A home is a forced savings vehicle that gives you tax incentives, can be used for income and can give a family a sense of security and somewhere the kids can always come back too.

    Too many years in the business & too much to say for this forum, I will touch on location factors that may not make certain areas safe and values are dropping like rock because of this. But for the most part, Shiller’s over all scenario is alarmist and WAY OFF BASE!

    Oh yea, why rent? All your doing is paying off someone else’s mortgage and building equity for that person on your dime. imo

    bosh

  • Report this Comment On December 27, 2011, at 8:55 PM, burningdaylight2 wrote:

    One aspect I haven't seen mentioned is the excellent tax shelter benefits of owning rentals. I have several and I will tell you some are real headaches, but all the deductions make it worthwhile to me because I have a high income day job and at the end of the year I get most all of my money back.

    i have read Schiller's books and yes, he is smart. I think tax policy hasn't figured much in his scenario.

  • Report this Comment On December 28, 2011, at 11:46 AM, duuude1 wrote:

    Hi Bosh,

    Over analyzing? For a purchase that for most people is the single largest purchase of their lives? I think there hasn't been enough analyzing either macroeconomically or for individual purchases - which is partly why we are in this mess to begin with. Individually we need to ask two important questions - can I afford the price being asked - and should I pay the price being asked (and then there are moral questions like - if someone offers me "free" money to buy a house should I take it)?

    C'mon duuude this is the Motley Fool where we analyze to death the intricacies of each company we invest a few hundred $$ in - and you think that the work that Shiller does and the things he says about such a major purchase like homes is over-analyzing? The scale of the purchase price alone tells you - this analysis isn't close to being enough!

    I think he's only scratched the surface of the good questions he's asking about the prices people pay for things like homes or stocks. Isn't it true that people are incompetent at paying fair prices for many things - like tulips or stocks - and more recently... homes? Don't you think it would help people in the long run to make good decisions about the price they pay for such a major capital investment? Do you want people to overpay?

    I take it from the number of homes you've been in, either you're a realtor or a burglar - I'll assume realtor. As a realtor (or as an architect like MKarch) I can certainly understand why you react strongly to perceived negative analysis of your industry. But look, if someone reliable came out with a report saying that engineers (like me) are systematically underengineering gizmo X (or more importantly airplanes or automobiles) - do I attack that report or analyst - or do I make the necessary changes to make sure I, and the engineering industry, are doing the right things? Should I immediately say the report is CRAP - or should I fix the mistakes I made in your car's safety systems?

    First, negative reports are not an attack - they're an opportunity.

    Please note - Shiller is NOT attacking the real estate industry - he's providing 1) data 2) analysis 3) informed opinion and 4) possible outcomes.

    Have you looked at his data? Here's a link that connects to his various databases:

    http://www.econ.yale.edu/~shiller/data.htm

    Second, although I respect realtors and architects and others in the industry for the difficult work you all do, I don't believe your position in the industry gives you special insight into the industry. Take this post by Anuragupta on a different topic:

    http://boards.fool.com/1081/a-great-director-paired-with-a-g...

    But it is relevant since engineer's expertise on CRAP was clearly not enough to keep them from losing their jobs - I've seen this plently of times myself. According to many old-timers, new info or info from others outside of your industry are clearly not relevant - if you think that then you're making a mistake.

    <i>"to build a house tomorrow will always be more expensive than today. You just can’t get around the building components becoming more expensive."</i>

    Bosh, is the majority of a home's building cost in materials or labor? I agree with you materials costs will go up (usually at the rate of inflation). So where do the opportunities to reduce cost come in? Look at the auto industry. Look at steel. Look at a lot of previously labor-intensive industries where the industry-insiders said "no way to reduce cost" - they are out of jobs since it now takes a couple dozen people to run a steel mill where it previously took hundreds to thousands.

    I'm asking you all to NOT dismiss thoughtful information from outside of your industry just because it is not to your liking - that is a recipe for extinction. Don't be a dinosaur. Absorb and adapt.

    Best,

    Duuude1

  • Report this Comment On December 28, 2011, at 2:48 PM, boshmontro wrote:

    Duuude1

    I can see how someone with an engineering background could be taken back a little by my comments of overanalyzing. However, I too analyze every day and sometimes I find my self overanalyzing a particular job. I have 1st hand knowledge of contracting in the residential and commercial field where 30 years ago I decided to change career paths to something not as physically demanding in my later years. I currently am a Real Estate Appraiser and have been analyzing markets for 30 years.

    I am only commenting on the excerpt of the interview that was available here online. Nowhere is it mentioned oh, lets say the cost of a dollar in 1963 vs the cost of a dollar today. Where a home purchased for $23,500 in 1963 just sold in 2008 for $650,000 as just only one example and what is the inflation factor figured into that. I’m sure many here reading this could relate if they knew how much their parents bought their homes for and what they are currently worth. As I originally posted “A home is a forced savings vehicle that gives you tax incentives, can be used for income and can give a family a sense of security and somewhere the kids can always come back too.” These are factors that are beyond the “investment” mentality that can’t be ignored. That aside, what I take exception too is his opinion that over the next 20 years home prices will fall. ?????????? He talks about “the out of style factor”. Well yea, that is called functional obsolescence and is considered every day in the depreciation of a property within the cost approach to value. He indicates the turn of the century hand crafted to the 1950’s track war home. This is great alarmist fodder for interviews but in reality he is comparing apples to oranges. Nowhere is it mentioned there may be a QUALITY issue which will push the price down.

    Don’t get me wrong, I am a fan of both Case & Shiller and in fact I have some quotes of both of theirs within my reports. But some blanket statements that were said in this interview are way off base and very misleading.

    I know, Shiller is a HUGE residential property owner and he is trying to scare the bejesus out of everyone so they don’t buy a house for themselves and will rent one of his! LOL

    bosh :)

  • Report this Comment On December 28, 2011, at 7:00 PM, duuude1 wrote:

    Hey Bosh,

    Good comments and insights - like inflation's effects on purchasing power.

    Regarding overanalyzing - in some regards I again agree - analysis-paralysis is something we engineers talk about when someone can't get out of crunching numbers or testing a zillion times without ever pulling the trigger and making a decision.

    But at the same time both white-collar engineers and blue-collar duuudes in the trades agree on the principle of "measure twice, cut once". The bigger the job, or the more $$s on the line, the more time you want to spend making sure your numbers are right - the top gun mavericks who go purely by gut - they're not much for this world...right? We pray and hope to deal with folks who go by their gut since they are our opportunity to make a killing!

    In terms of effects of inflation - Shiller's all over that - he incorporates the effects of inflation in his database (again look at his data you'll see what I mean). And even in his brief interview with Housel, he clearly mentions that over the long term home prices don't even keep up with inflation (or if so just barely).

    You mentioned the 1963 house for $23,500. Do you know what wages in 1963 were? Median income was $6,200 according to census report (college grads median income was $9,700):

    http://www2.census.gov/prod2/popscan/p60-043.pdf

    So depending on the background of that family, it was somewhere between 2.5-4X median income in 1963. The actual median home price in 1963 was $18,000:

    http://www.census.gov/const/uspriceann.pdf

    Median income in 2007-8 was around $52,000:

    http://www.census.gov/prod/2009pubs/acsbr08-2.pdf

    Median home price in 2007 (peak of the housing bubble) was around $248,000, and in 2010 had dropped some to $221,000:

    http://www.census.gov/const/uspriceann.pdf

    So since 1963-2007 the median household income went up just shy of 10x - and the median house price from 1963-2010 increased just over 10x. There you go - the effects of inflation. Not such a killing anymore, huh?

    Anyways, I agree with you that the problem is that this topic, and Shiller's analysis, has so much more than a few minutes interview can cover.

    All of these back and forth issues about inflation and tax benefits and cost of maintenance or cost of sales commissions and other fees - all of these can easily be settled by putting all these factors into a spreadsheet. Instead of waving our arms and saying "taxes make this a good investment" - all you have to do is put together a quick spreadsheet (or use the many available online) to see if what you are saying is true.

    I did that over a decade ago, and decided not to buy a house and rent instead. I revisit every year, and especially after reading Shiller's books I have continued that decision. In that period, my net worth (all assets minus all liabilities) has more than quadrupled even with our recent downturn.

    Most people, the moment they buy a house are instantly net worth negative, and are paying for a depreciating asset AND in some locations since they overpaid are throwing money away - never to recoup.

    Just like we have again and again learned that banks and businesses should be light on liabilities versus assets - I think people should be too.

    Although we don't want to discourage home buying for people who truly can afford it - I think it's not a bad idea to scare the bejeesus out of folks as well to make sure they do their due diligence before buying.

    Duuude1

  • Report this Comment On December 28, 2011, at 7:33 PM, kyleleeh wrote:

    <<Where a home purchased for $23,500 in 1963 just sold in 2008 for $650,000 >>

    Do you have idea how filthy stinking rich you would be today if you had put $23,500 in the S&P 500 in 1963?

    Owning a home is lifestyle choice, as an investment turning $23,500 into $650000 over a 50 year period is a pretty sub-par return

  • Report this Comment On December 28, 2011, at 8:08 PM, srvfan100 wrote:

    This guy has no real clue.

    I work in the construction industry and we charge MORE than we did 5 years ago.

    We have to charge more everything we buy to support the company costs more. Just like everything you buy to support your home costs more.

    The only thing that can possibly go down would be the price of the land, and in land starved areas where most new homes are built by tearing down the old homes the prices haven't dropped that much.

    In states where there are still vast land tracks that are easy to develop then sure I can see it staying down for some time.

    Across the North East though his theory simply doesn't hold.

  • Report this Comment On December 28, 2011, at 8:34 PM, kyleleeh wrote:

    <<This guy has no real clue.

    I work in the construction industry and we charge MORE than we did 5 years ago.>>

    Case/Shiller Index accounts for inflation in figuring home values. He never said homes don't go up in price, he argues that the increase isn't much more then the inflation rate and often it's less.

    A good place to be comfortable in a raise a family...sure. But not a good investment vehicle.

  • Report this Comment On December 29, 2011, at 10:59 PM, Pinpress wrote:

    Where I live in Southern California, rents for a comparable home are virtually identical to what we are paying in mortgage after making allowance for the difference in income tax. The big financial difference is that at some point in the future, I have hope to make back at least a portion of what I've paid in. My home may not be an ideal "investment vehicle" but it beats renting when there are no leftover dollars to invest. Yes, there could be leftover money if we chose to live in an apartment instead of a house, but it only makes sense to compare similar living arrangements.

  • Report this Comment On December 30, 2011, at 11:57 AM, rwhiteohio wrote:

    First I would consider the context of Buying a Home is you best investment. I don’t think that phrase was about capital gain but rather security and simply not throwing good money after bad renting. It similar to leasing a car, you lease and at the end you have nothing to show for your investment.

    In addition I think the government’s impact on the housing market over the last 30 or so years has had the biggest negative impact. Owning a home went from the “American Dream” to the “American Right” ACORN in the late 70’s early 80’s governments essentially forcing banks to lessen their standards and make riskier loans to people who otherwise couldn’t afford them.

    I deal in the housing market and virtually every home I have purchased had one thing in common. They were in disrepair simply because the home owner couldn’t afford the upkeep. In my community alone there are over 220 foreclosures. That’s a lot for such a small community but it’s also a community with a relatively low income demographic. My opinion is, if the government would have stayed out of it, banks were left to do what they do best and loan money to credit worthy individuals, kept the loans to 80% of equity rather than the government imposed 120% most people would have kept the homes they could afford.

  • Report this Comment On December 30, 2011, at 1:49 PM, egobasher wrote:

    Right now, the cost of a mortgage is lower than renting. Add to that it is a buyers market with the foreclosure rate so high and the abundance of homes for sale. If you factor in the mortgage interest deduction on your taxes your way better off buying than renting at current market conditions.

    It just makes good economical sense. Talk to a good accountant and run the numbers.

    One thing is for certain, it is all about location, location, location.

    I live in Berkeley CA and homes are still selling for a ton of money. Two doors down a house sold for $700,000 and it is about 1,300 sq. ft.

    Last year a house on the block sold for $645,000 with 900 sq. ft.

    Both sold in two weeks.

    However houses 20 blocks away are down 30% or more from their peak. Not our neighborhood. We are right near U.C Berkeley campus.

    Location, location, location.

  • Report this Comment On December 30, 2011, at 2:13 PM, prestonml wrote:

    I live in Australia where people are buying are large numbers of properties as investments and losing money in the short term (negative gearing) with the goal of making it in the long (capital). The house might become dated; however, the land will hold its value. Properties that are near key infrastructure or growth such as train stations or a new mine continue show strong capital growth opposed to those that are not. There is always money to be made in any market one just needs to pick the right investments!

  • Report this Comment On December 30, 2011, at 3:07 PM, HoosierRube wrote:

    There is a lot missing from a strictly analytical approach to anything.

    Mainly, emotion. People want what they want. It's rarely an analytical home buyer. They know what they can afford and they know what they want. And they are willing to bid it up to their affordability point.

    I'm an avid fan of Shiller's, but the purely analytical approach falls short in this respect.

    If analytics were the only driving factor, Divinci's Mona Lisa would be worth less every day because the paint fades and peels. You could buy an exact newly painted Mona Lisa for next to nothing, but thats not what drives the buyers.

    Houses are emotional purchases.

    Additionally, all you have to do is look at Home Depot and Lowes to know that any home can be upgraded. Added to. Remodled. Torn down and rebuilt. So its more than a home, its a homestead.

    As a long time renter, I yearned for the day I could put a nail in the wall; or upgrade appliances; or make it my own to do with as I pleased.

    Take for instance my circumstance; I bought a 3 year old lake home at the beginning of the housing collapse. It wasnt an investment in dollar terms, it was an investment in my quality of life.

    After five years of gardening, and landscaping and making it my own statement, I am a richer man. I also quite rightly will make a $$ profit when I'm too old to no longer piddle around in the garden.

    The property is a better property than when I bought it.

    You cannot be to analytical about people and how they behave. We are a fickly bunch.

    You can build a new home, but you cannot create more land.

    This time Mr. Shiller got way to analytical with numbers. And we all know, there are lies, damn lies and statistics.

  • Report this Comment On December 30, 2011, at 3:26 PM, HoosierRube wrote:

    I would like to add one other point.

    A number of posts include mortgage costs and compare the results to other investments where you are not borrowing money to make the investment.

    So for an apples to apples comparison, consider paying cash for your home and run the numbers again.

    Our first home was bought with a mortgage and our 2nd home was paid for with cash.

    If that cash were in the market and assuming I made nothing but the best investments, I would have still lost a good percentage of that cash.

    Today I still have a home. I have no mortgage payment and its worth more than what I paid for it due to its location and some sweat equity I spent in landscaping.

    I'm not concerned about rising rents, I'm not concerned about having a roof over my head. And I'm not concerned about losing a single penny.

    Peace of mind is hard to come by. But I have that now because I bought a home. And I bought it with cash.

    Inflation alone will keep my value store.

  • Report this Comment On December 30, 2011, at 3:35 PM, dcorley wrote:

    Bought my house last year for 117K (and paid too much). The house was a short sale, down from 350K.

    Was going to pay cash, but the 4.25% mortgage was too attractive.

    Now I have a 3 bedroom 2 bath 3 car garage house with an in ground pool.

    It is a hell of a lot less than rent.

    News flash: In thirty years, this house will be selling for $30 million (hopefully, it won't be $30 quadrillion). Mark it down.

    60 miles from Silicon Valley.

  • Report this Comment On December 30, 2011, at 3:43 PM, B1gDaddy0Wizard wrote:

    With all due respects, Mr. Shiller, you almost have this right in your article above about house prices, but you have it totally wrong in the manner in which it is going to happen. You see the housing price market has gotten to appear pshchologically to be improving much like the jobs market, even tho' it will by a ruse in some sense. With massive inflation headed our way, what house prices are going to do and be exploited by the politicos, is they are destined to go up, but slower than the rate of inflation, and at the same time house prices are going to creep up due to several things monetarily but largely due to inflation. As a result, as you maintain, house prices in terms of real value are going to stagnate but look like they are going up at the same time. It is just that we are all going to see if we are smart enought that our fiat currency is going to go down. Watch gold which is really a bad investment unless you want to just retain value in the currency that you wish to trade in!? LOL Dr. Reeves

  • Report this Comment On December 30, 2011, at 4:42 PM, kyleleeh wrote:

    <<If that cash were in the market and assuming I made nothing but the best investments, I would have still lost a good percentage of that cash.>>

    How do you figure? Did Warren Buffet get rich buying houses? Real estate costs are at 2003 levels, in 2003 the DOW was in the 8000s today it's over 12k

  • Report this Comment On December 30, 2011, at 6:48 PM, MKArch wrote:

    Kyl, Morgan, anyone else,

    I think I am keeping to the spirit of my pledge to not beat my argument here to death anymore by asking an honest question that I don't know the answer to.

    From everything I've been reading it does seem like the argument that a house is a bad investment is based solely on price appreciation of the house. From what I am hearing the argument is just that the price of a house will probably only appreciate at about the rate of inflation which I agree with and an S&P 500 index fund investment over a long period of time would probably do significantly better then just keeping up with inflation which I also agree with.

    My question is does Shiller also take into consideration the point at which rent's exceed mortgage payments and ultimately the years when you an owner would have no more payments but a renter will be paying till they drop? Is Shiller looking at the total picture of owning vs. renting or just the narrow view of price appreciation vs. stock market returns? If just the narrow view why?

  • Report this Comment On December 30, 2011, at 6:52 PM, bhiuhbgt wrote:

    In real terms, it's quite plausible that home prices will either not recover, or decline for years, but it will depend on location as always with Real Estate. Many locations have not corrected and prices are being artificially buoyed by low rates. Rates will eventually go up, and the government will not be able to justify supporting the housing market indefinitely, due to the huge budget deficit. Continued problems with foreclosures, unemployment and slow growth will continue to put downward pressure on prices for years to come.

    As to whether homes will follow valuation models of manufactured goods is hard to figure out. The big irony is that in one sense they already are since depreciation is a tax offset. I would also argue that older homes can be modified to include technological innovations, and aside from that are part of the cultural heritage of a nation so should be treasured.

  • Report this Comment On December 30, 2011, at 7:44 PM, MKArch wrote:

    O.K. this one is probably breaking my pledge but I did a back of the napkin and would like comments/ criticism:

    I think Kyl used a starting point of $1,000/ month rent vs. $1,500/ month mortgage over 30 years. I assume 3.5% average annual inflation and I get rent breaking even with a mortgage in 12 years.

    I assumed the savings could earn 5% over inflation so I calculated the returns at the end of the mortgage term for each of the 12 years and come up with a total of $142,344 earned but this does not include subtracting money when rent is growing increasingly higher than the mortgage payments over the last 18 years of the mortgage.

    I did calculate that the yearly rent payment after 30 years and 3.5% inflation would come out to ~$34,000. That would mean it would only take 4 years of no housing payments (after the mortgage is paid off) to offset the 12 years offset all of the gains from saving and investing the difference between rent and a mortgage.

    I'm not sure if 5% is the right number but again I didn't even include money lost over the last 18 when rent is increasingly more than the mortgage or tax deductions. What am I missing?

  • Report this Comment On December 30, 2011, at 8:26 PM, MKArch wrote:

    O.K. I think I have something even closer to reality. I included the 3.5% for inflation in the returns on invested money and calculated 8.5%/ year gains. That brings the total returns on the first 12 years when rent is cheaper to $343,417 at the end of the 30 year mortgage. Then I took the inflation (3.5%/ year) adjusted annual rent at the end of the mortgage of ~$33,682 less the $18,000/ year rent at year 12 and divided by the remaining 18 years to come up with rent increasing $870/ year over the remaining 18 years. When I calculate 8.5% returns on this I come up with at total of $273,915 opportunity lost not investing the difference when the mortgage is lower than rent.

    So the $343,417 gain from years 1-12 less the $273,915 loss from years 13-30 nets out to a gain of $69,502. With rents at $33,682 after 30 years it will take two years of no shelter payments to offset this net gain if I did this all correctly. This is all done by hand so I could have made a math error somewhere and maybe someone could point out an error in logic but if this is about right it looks like owning trounces renting when you take everything into account. I didn't even get to tax saving.

  • Report this Comment On December 30, 2011, at 8:51 PM, MKArch wrote:

    I see one logical error, I increased rent linearly but it will be parabolic in reality. That would make the gains in years 1-12 greater and the losses in 13-30 less but it doesn't seem like it would help enough to make renting a better total investment. Maybe it takes 4-5 years of no shelter payments to offset the net gain from renting instead of two. Given 8.5% gains are not set in stone but no rent is assuming you keep up with mortgage payments owning still seems like the better investment. And again this does not take tax savings into account.

  • Report this Comment On December 30, 2011, at 9:52 PM, kyleleeh wrote:

    Mike

    Inflation causes income to rise as well (often not as much but it depends on your line of work) the $500 a month just a starting point, I work in medicine and our income has been rising faster then inflation for some time, so it's been no problem increasing amount I save over time.

    This is true for the person owning as well, but having a head start makes a huge difference over time.

    Also it's been pointed out in other peoples posts that you don't have zero housing costs after the mortgage is paid off, tax, insurance and upkeep will rise as the house gets older and the appraised value goes up. So you can't assume no living costs for the owner in that scenario.

    Even in your calculation it shows that the saver will be able to buy a home at retirement and still have a larger nest egg then the owner even though they now both have the same living costs going into retirement.

    Another factor that most people don't consider is that homeowners are paying interest on the house they buy. A 30 year loan at 6% interest will require the house to double in value before you break even on what you "really" payed for it.

    Still I think if you can afford to save and own, then go for it. But if it's only in your budget to do one or the other you would be better off saving then buying...a lesson many people learned the hard way in the past 4 years.

  • Report this Comment On December 30, 2011, at 10:07 PM, steltek wrote:

    "Agree with DJ though. The elimination of a subsidy (like mortgage interest deduction) is bringing the playing field back to par, not forcing it in any particular direction."

    A subsidy is direct monetary aid paid directly toward something. The government does not pay money toward mortgages.

    I.e. assuming $100,000 income, paying $30K in interest, saves the owner approximately 30% * $30k = $9,000 in taxes. Calling it a subsidy implies the government pays that $9,000.

    Is this what you are saying?

    Partisan rhetoric has taken to calling tax incentives "subsidies" to imply the government "loses" or "pays" money where money is not collected.

    By the same argument every dollar spent in America, could theoretically be collected by the government. So is the delta between government spending and total GDP also a subsidy or a loss?

    Using this terminology implies you support this view. Please explain your use of "subsidy."

  • Report this Comment On December 30, 2011, at 10:30 PM, kyleleeh wrote:

    Steltek

    sub·si·dy Pronunciation (sbs-d) n. pl. sub·si·dies

    1. Monetary assistance granted by a government to a person or group in support of an enterprise regarded as being in the public interest.

    2. Financial assistance given by one person or government to another.

    3. Money formerly granted to the British Crown by Parliament.

    Tax breaks do count as monetary assistance, subsidies are not necessarily direct.

    Your argument is based on what dictionary you look up the definition in, but that's an argument for an English literature website not the Fool.

  • Report this Comment On December 30, 2011, at 10:35 PM, MKArch wrote:

    Kyl,

    I calculated rent at year 12 after 3.5%/ year inflation and divided the increase evenly and then did the same thing from year 13-30 so my result above is off somewhat but I only get ~$70K net gain. Even if it's double that if I distribute the rent increase correctly it won't be anywhere near enough to buy a house outright after 30 years. I think average home prices are around $200K now so at 3.5%/ year increase they'll be around $560K in 30 years. If I get the energy tomorrow I'll calculate the rents correctly but it doesn't look like this will get the net anywhere near $560K at year 30.

    I see your point that salaries should increase with rent. I could argue this is retirement age and you can't count on a salary but my real point is it looks like when you net everything out the amount of money you would earn investing savings from renting while it was cheaper than a mortgage would be offset by only a few years of no shelter payments even including tax and insurance payments. And again I'm not even including the tax savings from owning which accrue up front and offset much of the savings from low up front rents.

    It still seems to me that unless you plan on kicking the bucket shortly after paying off your mortgage owing beats renting hands down.

    Mike

  • Report this Comment On December 30, 2011, at 11:06 PM, kyleleeh wrote:

    I don't how you came up with that number, the interest calculator on money chimp shows that even if you left your savings at $500 a month for 30 years you would have 740K investing at 8% while a 200K house at 3.5% would only be worth 560K after 30 years. The renter could buy the 560K home and still have 180K in assets, and that's without ever increasing their savings amount over the 30 year period which is not realistic.

    If you account for wage increases over time and under your scenario the owner has to wait 12 years before their savings rate catches up with the renter...they will still have less assets at the end of that 30 year period.

  • Report this Comment On December 30, 2011, at 11:20 PM, MKArch wrote:

    Assuming rents increase with inflation at ~3.5%/ year the $1,000/ month current rent will be the same as the $1,500/ month mortgage in 12 years. From years 13-30 rent will continue to increase while the mortgage is fixed reversing the gains. All I did was calculate the gains year by year from years 1-12 when rent was cheaper and then calculated the lost opportunity from years 13-30 and subtracted this from the 1-12 gain to get the net after 30 years. I did a quick check from year 1-2 and the difference between evenly distributing the rent increase and correctly distributing it was only ~$1,000 so my number above are not off enough to matter.

    For a frame of reference as seen above the total increase in the market value of a house over 30 years is only ~180%. The gains on $6,000.00 in pocketed savings renting in year one assuming 8.5% returns for 30 years is $69,350.00 or over 1000% gain. This sounds like pocketing savings renting and investing it would trounce a mortgage until you carry this out to the entire mortgage life and beyond. You only have gains for ~12 years and they rapidly decline and then you have losses for the remaining 18 years. And worse after the mortgage is paid off and a renter is still making payment till they drop.

  • Report this Comment On December 30, 2011, at 11:35 PM, MKArch wrote:

    Here's the end results of my calc's by year:

    1. $69,350

    2. $58,590

    3. $49,091

    4. $40,721

    5. $33,360

    6. $26,904

    7. $21,254

    8. $16,323

    9. $12,036

    10. $8,320

    11. $5,112

    12. $2,356

    ------------------------------------------

    Total Gain $343,417

    13. ($3,778)

    14. ($6,964)

    15. ($9,628)

    16. ($11,831)

    17. ($13,630)

    18. ($15,075)

    19. ($16,210)

    20. ($17,074)

    21. ($17,703)

    22. ($18,129)

    23. ($18,380)

    24. ($18,480)

    25. ($18,451)

    26. ($18,315)

    27. ($18,035)

    28. ($17,780)

    29. ($17,411)

    30. ($16,991)

    --------------------------------------------

    Total Lost Opportunity: ($273,915)

    Total net: $69,502

    Again this was done evenly distributing the rent increases but my quick check shows it won't increase the net enough to matter. The tax savings which will accrue in the beginning and offset much of the savings from renting would make a big difference. I thought seeing all of the numbers would put what's happening in better context.

  • Report this Comment On December 31, 2011, at 12:04 AM, Melaschasm wrote:

    Rent or Own

    Assuming a landlord is profitable over the long run, it should cost more to rent a house for 30 years than to own it.

    However, individual circumstances can vary greatly.

    Renting provides greater flexibility. You can easily adjust your home size and location as your family and job situations change.

    It can be difficult to diversify risk when you purchase a home, which is something even professional financial wizards often have trouble evaluating.

    I have often heard that stock market investments should only be made with money that you will not need for at least 5 years. A home is less liquid than the stock market, so I recommend having confidence that you will live there for at least 10 if not 15 years.

  • Report this Comment On December 31, 2011, at 12:30 AM, kyleleeh wrote:

    Ok I see what your calculating...the difference in savings over time as rent goes up but mortgage stays the same. But even with those variables factored in by your calculations the renter still comes out with more assets then then owner.

    You cite the tax advantages of owning but savings have tax incentives as well. Company 401k plans are tax deductible and money from a Roth IRA will not be charged a dime in taxes when it's withdrawn during retirement. Not so much for someone dependent on Social security because they sunk to much into a mortgage to save enough to pay for food and medical care. Getting tax savings early in life may not be as advantageous as not having to pay taxes at all on retirement income.

    Melaschasm makes good points about the other advantages of renting. Out here in California I know a ton of laid off construction workers that could land a great job on the gas fields in the Midwest if they were not tied down to a house they can't sell. Instead they get deeper into debt as their unemployment runs out.

    Again Mike I think if people can afford to save AND own that would be the best choice. But I know to many elderly people who own homes outright but don't have enough cash flow to cover food, electricity and medical care and are in serious trouble because of it. With stocks you don't have to sell all of it in a down market, just what you need to get by, these people are going to have sell all of their real estate into a down market, and then become renters in the end after all. I think they would have been better off saving then owning.

  • Report this Comment On December 31, 2011, at 12:57 AM, jlclayton wrote:

    MKArch and kyleleeh,

    Thank you so much for the intelligent and lively discussion about this topic. You both make excellent points and provide much food for thought. Although my husband and I just bought our dream house on 15 acres with a loan of 4% interest, which was the right decision for us, we have 4 daughters who all have different circumstances with their lives and careers. This is a great discussion to have with them so that they can make good choices with their housing and investing dollars.

    Kudos to you both!

  • Report this Comment On December 31, 2011, at 1:55 AM, kyleleeh wrote:

    Then our work here is done!

    Glad we could be of help, it was truly a pleasure debating with Mike.

    I'm going to leave this thread in 2011 and wait for Morgans next article to join in again.

    Good discussion Mike

    Kyle

  • Report this Comment On December 31, 2011, at 9:25 AM, MKArch wrote:

    Agree buy what you can afford and leave some room for savings. My guess is the banks will make of this for a long time.

    Happy New Year Everyone!

  • Report this Comment On December 31, 2011, at 9:58 AM, bmillin wrote:

    A house is on land. Land cannot be manufactured but increases or decreases in demand and holds the real value of homes, at least along the coastal states.

  • Report this Comment On December 31, 2011, at 10:09 AM, ETFsRule wrote:

    In Connecticut a typical suburban house is aroung $250k, and an empty plot of land is around $75k. So, based on this rough evidence, I would say the land is about 1/3 of the cost, and the actual house is 2/3

    I think it's likely that houses will provide a negative real return, due to being a "manufactured good", as Shiller points out. Land will probably have a positive real return, due to scarcity, as our population increases every year. Overall I think it's fairly safe to say that houses will have a very low real return, probably close to zero.

    Having said that, houses are still a much better "investment" than renting, which has a real return of -100% (you are guaranteed to lose everything!).

  • Report this Comment On January 01, 2012, at 12:06 PM, TSRJR wrote:

    When I look back at housing prices the trend upwards was started by the boomer generations demand for housing in a limited market of housing stock. The boomers increased demand created opportunities for builders to address this need. Increasing incoems for this group also created increasing expectations by the group on what housing and lifestyle meant to them.

    The builders became big in scope and in the ability to control the creation of housing. This created price setting of new home sales which of course also impacted pricing on "older homes". Today many builders control the pricing of homes by land banking the "available" land available for development. The ability to build homes in the locales is dictated by land availablity. The approval process is skewed by the influence larger builders have with municipalities and the municipal regualtions on housing. To know the players as familarly as the builders get to know the bureaucrats is a competitive advantage in successgfuly developing and pricing homes. As well large developments get the attention of municipal services providers because it meets their goals (efficient delivery of services within the boundaries or goals of the municipality, creating a larger tax base to run the bureaucratic departments), a very important aspect of planning approval for development prospects.

    The boomer need for housing created demand, a demand for something more than the previous genenration expected from housing, the demand of increasing value of the residence as time went on.

    This expectation supported rising prices. The tax write off of mortgage interest created an incentive to upsize the unit on the expectation of rising values magnifying the potential profit from future sales of property. This fostered easier payments since the tax deduction reduced the amount needed to actually pay the mortgage on a net basis.

    Builders needed efficient methods and styles of housing to maximize profits from their land parcels and housing developments have gone to cheaper inputs and styles of construction as well as less land space required for units, all approved by municiplaities as services cost less to supply to denser housing areas and the tax revennue is increased in these dense areas.

    Setting aside the efficiency improvements and you will find that to insure an older plaster constructed home ( now considered a high end luxury building style) would be twice as high on a replacement value scale.

    So population demographics have skewed the house pricing model, large developmental control by builders, lack of knowledge of skills needed to build by the average home by purchasers, and, the need for increased tax revenues by municipalities

    makes the understranding of value cloudy to the buyer. We tend to buy on preceived lifestyle images: what we think we can afford to pay, what we expect the housing rate of price increase to be for our "investments", our homes, and, an expectation of continuing value increases in an atmosphere of more efficient yet less solidly contructed housing.

    We have seen the easy access to money chase up house values, the builders build many more units to build houses to meet the expected demand, and, we have seen a major correction in housing caused by easy money and very questionable mortgae underwrittinfg practices, some would say criminal practices and justifiably so in some cases maybe many cases in the recent years.

    An over supply of housing, a housing market that did not recognize the current scenario and kept building again on the boomer style projections of rosier times again have proven to be unrealistic and added to the current malaise in the housing market.

    Add in an aging boomer demographic with changing housing needs, lookiing to cash out on their "investment", the house, and we see a major issue arising for them and the generation beneath them who are looking for housing but many who can't afford the price of entry nor have expectations of gains like the boomers did and you have an intersting housing market. Cosider the fact that so many municipalities are in budgetary problems and look to increase tax revenues through higher taxes , fees, permits, less services, user pay services and we can see the housing crisis moving into another phase requiring much time to revalue hosuing and the sevices provided to home owners.

    With the average worker not seeing real rate increase in income, actually decereasing when inflation is factored into the equation, it makes it hard to see how housing markets generally have many favourable factors attached to them, especislaly as an investment vehicle in peoples mid to longer term periods.

    The social fabric of hosuing and how it is delivered and serviced requires a whole new perspecitve.

  • Report this Comment On January 01, 2012, at 10:17 PM, esotericevets wrote:

    One factor addressed tangentially might be worth a direct consideration. A realistic assessment of ones' suitability to be an owner or a renter is of great import when considering to what camp one belongs.

    I have seen owners who could not control the impulse to borrow money for frivolous purchases. In other cases the ownership of a house was a source of unfounded stress which made life a misery for acquaintances.

    On the other hand, I have seen people become invested in their homes and abandon bad habits in the process. How much is it worth to become a fix it person as opposed to a bar hopper? I would argue that the ratio of comparative values could approach infinity.

    If one has the good luck to be able to find a house that also advances his interests, the benefits can be enormous. Picture a mechanic who buys a house that has a large garage which he puts to good use. The respect that he could garner could lead to higher pay or to having his own business. His acquaintances are more likely to regard him as a substantial individual and he will be given more allowances than a renter whose investments are generating little obvious impact. Gravitas mostly is good.

    Forrest Gump... I believe that the message in this name is that if one has a forest full of gumption, many other shortcomings can be overcome. Buying the right house can be a major step in owning gump.

  • Report this Comment On January 03, 2012, at 12:42 PM, nurseinthehouse wrote:

    Esotericevets - I agree with your comments. Senior care is very expensive especially when your parents our in one part of the country and you are in another. Just over the Christmas holiday I spoke with my parents about moving in with me in a couple of years and they are excited!! Now it's up to me to find a home large enough so that we don't kill each other LoL!!! Anyway, after reading the article I thought to myself, "this is perfect, by the time I look for a bigger house so I can move my parents in with me, I just may be able to get something of large capacity as well as a benefit like living on the golf course which will make my Dad happy!!" Bascially, the housing issue will depend on each individual's financial issues. For some it may mean renting forever, while others may find their diamond in the rough.

    I don't think it is good business to talk everyone into renting verses owning their home. Each has it drawbacks, but I think the proper thing to do is to talk about if a person is interested in owning to ensure their finances can substain the intended purchase, if not renting should be considered!!!

  • Report this Comment On January 04, 2012, at 11:29 AM, DJDynamicNC wrote:

    It is way the hell back there, but I want to shout out to @SkyPilot for raising a point I hadn't considered - rental costs will be maintained or increased through retirement, whereas a purchased house will eventually require only the cost of maintenance and taxes. Hadn't really thought of it that way.

    Anyway, carry on! This is a fantastic discussion (as usual).

  • Report this Comment On January 04, 2012, at 5:26 PM, mathdweeb wrote:

    All the comments above are interesting, but I think that we are missing something hugely important. If you assume that inflation will inevitably reappear (I do) and real estate currently give you the ability to lock in loans at historically low rates - you are essentially setting yourself up to repay the loan with greatly devalued money. If "all" the home does is keep up with inflation, and you've leveraged the loan heavily, you stand to make a great deal of money.

  • Report this Comment On January 06, 2012, at 3:33 PM, nowhereelse wrote:

    Built my house for $180,000

    Was valued at $725,000 4 years ago

    Now valued at $630,000

    Looks like I make a ton of money...

    the secret???

    LOCATION....

  • Report this Comment On January 08, 2012, at 9:21 AM, boshmontro wrote:

    It’s ALL about location! I think Shiller was talking about the Northeast, New York, Pennsylvania and the entire Marcellus shale region. After all the Fracking and infusion of the Fracking fluids in the ground water in the watersheds, property values WILL fall because there won’t be any drinking water. AH, the price for energy. ;)

  • Report this Comment On March 02, 2012, at 10:00 AM, fltraveler wrote:

    I've heard Shiller report this therory before and because he uses such a broad stroke and puts all housing markets into one bundle I put little stock in his coments. I'll been investing in real estate for 30 years and have never lost or had my investment not grow. Yes, there has been down years like now but they always come around. The trick is don't buy after real estate jumps and is at an all time high. I just bought a bank house brand new 90% complete 2,200 sq' for the price of a car in a great location. Bank homes are part of the markets adjustment, I still have a bank business I bought in the 90's after that great jump in the market.

    My opinoin is that a house is only an investment, you buy and sell like you would an investment. Now, I have a lot of patience and it is not unusual for me to hold on to something for 10 years plus. I have a historic home I purchased in the height of this market and 7 years later it's valued at 2.5 times what I paid (acording to a recent conservative bank appraisal). Yes, I put a lot into the house, but putting all real estate in one broad statement and one class is wrong I'm sorry.

    I'm writing this comment because I was watching Shiller on a major news station and he's brushes all real estate as one. CA, FL, NY, how about AR, how can you compare NY's real estae to what's happened in AR or AR to CT or CT to FL it's wrong. That's because real estate came jump 30% in some hot markets for years before it corrects itself. The trick is to buy when real estate comes down or adjust itself like now.

    I think if you are an invester out there and want to make a real good financial investment and you are willing to spent the time and research (looking at 30-50 year patterns) you will do very good. I tell my wife whenever we buy a house or property it's only an investment.

    Thank you for listening

  • Report this Comment On March 02, 2012, at 6:19 PM, LongtimeInvestor wrote:

    I did not read the whole string---it's very long now! So if I repeat anything above, I apologize.

    I have some 45 years experience in investing. I have and do invest in the stock market and in real estate as well.

    I have 7 years of post-high school education, and a 45 year career of dealing with financil and investment matters. I do have utmost respect for a few academics, but I have very little respect for most. A great many haven't a clue when it comes to real-world common sense.

    "Dividendgrowth" early in these comments, was very astute! (He, or she, doesn't have much respect for most academics either!) But Schiller has done some good work re the Index.

    To the points "dividendgrowth" made, I would add---with some 1,000,000 new households being formed each year, the demand for housing is going to continue, slowdown in population growth or not. And the pent-up demand right now is enormous!

    When you can borrow money at today's rates, and lock it in for 30 years!, I think anyone who has the money to buy a home and does not is really short-sighted! (I do respect Warren Buffet's views.)

    That said, two basics of investing need to be restated (probably have been somewhere in this long series), A-don't buy more than you can afford, but at present lenders won't let you if you are financing it! B-To the extent you are buying real estate as an investment, the most basic rule of investing is---DIVERSIFY! Everyone who is able to do so needs to invest, even if it's very modest amounts, in both the stock market and in real estate.

  • Report this Comment On March 02, 2012, at 6:25 PM, LongtimeInvestor wrote:

    Oe comment I meant to make. J Paul Getty, one of the first billionaires ever in America (made his money in oil), used the best strategy that could be employed in investing in anything:

    Buy whe everyone else is selling, and sell when everyone else is buying!

  • Report this Comment On August 24, 2012, at 5:19 PM, Johny205 wrote:

    I am a Realtor and general contractor and I am heavily invested in rental properties. In 2008 through today you can buy properties at great prices and rent them out for almost double your monthly payments. Being self employed it's also nice having the $160,000 a year depreciation deduction on my taxes also.It's a lot of headachs and probably isn't something that most people should do but if you can find the deals right when they hit the market and do all your own maintenance and management there is definitly money to be made.

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