8 Responses to “Shiller: losing your investment should make you happy” »»

1. Late Night Austin Real Estate
   Comment by Late Night Austin Real Estate | 02/23/08 at 8:07 am

   On the one hand I can agree with Shiller on how affordable home prices would be beneficial if they had been high. But falling home prices can cause problems. If someone needs to move or gets divorced and has negative equity it certainly can be something to cause a little fear.

2. Robert
   Comment by Robert | 02/23/08 at 12:29 pm

   With banks uninclined to allow short sales, it should be interesting this spring when sellers are asked to cough up in cash, more than the present value of their home. They can’t…which means they can’t move…which means nothing gets bought, which means greater than 12 months inventory on market. Now add to that the 8-12% increase in food prices and 4-8% increases on private student loans. A hot spring selling season? We’ll see. Schiller has been on the money with forecasts for 7 years. Yun hasn’t been correct once since he was hired ( initial forecasts, not updated). Schiller’s recommendation is to buy the smallest house you can IF YOU CAN”T WAIT. This author makes a compelling case for a recovery in the mid 2020’s: http://globaleconomicanalysis.blogspot.com/2008/02/housing-bottom-nowhere-in-sight.html

3. Gus
   Comment by Gus | 02/23/08 at 7:53 pm

   It’s high time to open the national debate about whether we want the stability of high prices or low prices.

   Keeping prices high will prevent loss of homeowner and financial institution wealth. However, it will leave home buyers with a lower standard of living (probably after they retire, because the national savings rate is about zero). It will also require about a decade of intervention until inflation gets income back in line with prices.

   Making prices low will cause the loss of a lot of money, and will be a contractionary force in the economy for a year or two. After that, there would be affordable housing, more money for spending and saving, and a naturally stable market.

4. John A Keith
   Comment by John A Keith | 02/23/08 at 8:25 pm

   Hasn’t Shiller been right, just once? Seems to me, he was pushing the “housing prices will drop” for seven years straight … he just finally got it right.

   No?

5. Gus
   Comment by Gus | 02/23/08 at 8:54 pm

   John,

   Actually, he never made a specific prediction that prices would fall. He said around 2003 that there was a bubble. He defined a bubble as a situation where prices separate from their historical relation to what were generally considered markers for their underlying value, incomes and rents. He was saying last year (before the lawyers made him stop talking about it, because he runs the company that provides data for the housing futures market) that prices were about 30% above those historical valuations.

   He has repeatedly made clear that bubbles are notoriously unpredictable. They often continue much longer than anyone thinks they can. They can end with a price crash (the tuplip mania in Holland ended on a single day in 1637) or a prolonged, slow decline (Japan’s housing bubble 20 years ago). They can re-inflate and then pop years later.

   He has said there can be a fundamental misunderstanding of, or shift in, fundamental value. He said perhaps people came to love their houses more starting in 2000, so they are willing to spend an extra 10% of their income on them rather than on other things. He didn’t understand why that would be so, but he left it open as a possibility.

   It’s true that if there is a bubble today, there was a bubble in 2003. If, in 2003, you made predictions for the next year based on a bubble popping, you would have been wrong. You also would have been wrong in 2004, 2005, and even 2006. Two months into 2008 there is still no consensus prices will crash. Anytime you predict a bubble, you are very likely to be wrong for longer than you are right. For the recent tech bubble, you would have four or five years of being wrong, and two of being right.

6. Sunshine & Lollipops
   Comment by Sunshine & Lollipops | 02/24/08 at 8:19 am

   Gus – Thank you for your excellent analysis vis-a-vis Robert Schiller’s work. But even taking his work into account, a prime maxim of real estate still holds true: location location location. While Schiller’s falling price scenario might hold true for overbuilt areas and suburban markets, demographic trends are pointing firmly towards further increases in value in city center markets such as Boston’s.

   People no longer want to live in suburbs, with their high gas prices, huge carbon footprints and lack of cultural amenities. and overall blandness of lifestyle. In-the-know buyers are flocking back to cities, especially liveable cities such as Boston.

   I will be bold here and suggest that the Boston city center condo market is, if anything, drastically *under* valued right now. Contrast our city to New York, where the median price is spiraling beyond $1000/sqft. Boston is far more digestible, more liveable, easier to own a car, more educated and richer in history, and yet our median prices are significantly lower than Manhattan. While lately we’re seeing more and more Manhattan-esque properties bursting onto the scene (e.g. the Mandarin Oriental, the Mews on Commonwealth, etc.) the remainder of our terrific nabes remain cheap in comparison. What gives??

   I posit that New York is simply (as usual!) ahead of the curve and that in time, Boston will be catching up… and quick. Hence, while Schilling is probably correct in his characterization of the broader market being in a bubble, I suggest that locally at least, there’s no bubble at all. That in fact prices here are actually extremely low when you consider value gained per dollar spent. I see nothing but bright times ahead for owners here in city center Boston!

7. anon
   Comment by anon | 02/24/08 at 5:31 pm

   John, what Shiller said a little over 7 years ago was that stocks were dramatically overpriced. The first edition of his book came out just weeks before the historic collapse of the dot-com bubble. The timing of his book could not have been better.

   His book did not cover real estate until the second edition was released in 2005. Once again, the timing was incredible.

   So while he has been pointing out bubbles for over 7 years, it is only relatively recently that this included the real estate bubble.

   Also, even if his timing hadn’t been so lucky, that wouldn’t make him wrong. He said that things were overpriced, not that a fall should be expected in the near term. Pricing discrepancies can exist for extended periods of time, and pointing one out isn’t incorrect just because it doesn’t resolve itself shortly thereafter. For instance, Ponzi schemes can persist for quite some time even though they are obviously unsustainable in the long term as the underlying asset (if there is one) is effectively worthless.

8. confused
   Comment by confused | 02/25/08 at 8:22 am

   Doesn’t all of this have to come down to simple economics? Can people afford to live in a certain area? Give me a break, the high price of gas is trivial in the grand scheme of house prices. Gas has gone up about 30% since the start of the decade. 2 bucks a gallon to $3. So lets be generous here at 20mpg and 2000 miles per month, you had a $200 dedicated to commuting a month and now would be paying 300 bucks a month. So $100 bucks extra in gas. Taking the same extremely generous approach, a 30% increase in a home from 300K to 400K at 6% interest increases the payment from 1800 to 2400 or 600 bucks. Change that to a 60% increase in prices, which is probably more appropriate, to 500K and the payment is about $3000 or an increase in $1200.

   Home prices will eventually be determined by what loan amounts are offered. There will always be somebody who will sign on the dotted line (and most likely cry foul later) for whatever is offered. As lenders trend back to the traditional levels related to income prices will trend that way.

   Hud has the Boston median family income at 77K. If that is true, then the median price will start to reflect that.

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