As real estate buffs, I’m sure most of you are familiar with
Robert Shiller’s work. As you may
recall, it was Dr. Shiller’s infamous book, Irrational Exuberance, that
accurately predicted the bursting of both the dot-com stock bubble and later the housing bubble. The first edition of his book was published
in 2000, and the second edition (that focused more on the housing market) was
published in 2005.
Since Dr. Shiller predicted the collapse of these bubbles (especially the housing bubble) so accurately, he has risen to “prophet status” in the minds of many
media pundits. At least once a month, it
seems I read an article where he is cited as the expert on what the future
holds for the real estate industry.
Most of the prognosticating, seems to center around some
form of the chart below:
While there are many different ways to present this
historical housing data, most of the discussions, with Dr. Shiller focus on the
right side of this graph. “ Are we at the bottom of the market?” “Will housing prices return to their previous levels?”
“Will housing prices now follow a more traditional trajectory?”etc.
After watching a number of these interviews, I’m starting to
think Dr. Shiller is getting tired of these questions. This is especially true for the interview I
saw last week on Bloomberg television.
At one point, the interviewer (Trish Regan) challenges Dr.
Shiller’s lack of enthusiasm for the most recent housing stats that suggest a
rebound may have started.
“"Then why buy a home?" she asked.
"People trap their savings in a home. They're running an opportunity cost
of not having that money liquid to earn a better return in the market. Why do
it?""Absolutely!"
Shiller exclaimed. "Housing traditionally is not viewed as a great investment.
It takes maintenance, it depreciates, it goes out of style. All of those are
problems. And there's technical progress in housing. So, new ones are
better.""So,
why was it considered an investment? That was a fad. That was an idea that took
hold in the early 2000's. And I don't expect it to come back. Not with the same
force. So people might just decide, "Yeah, I'll diversify my portfolio.
I'll live in a rental." That is a very sensible thing for many people to
do."
Notice
what he said about viewing housing as an investment—he clearly believes
“investing in housing” (for the purpose of getting a financial return) is a bad
idea. He goes on later in the interview
to show that the real return on a housing between 1890 and 1990 amounted to a
0% return.
You’re
welcome to watch the whole interview here (be warned, it’s about 10 minutes
long):
I’m
certainly not a real estate expert, but this seems like a major paradigm shift
for the real estate industry, and possibly for society at large.
Ever since I bought my first home 15 years
ago, I’ve heard and believed that my house was a good investment. While that has personally worked out well
for me, the future will likely be very different for those who are buying homes
today.
If
we relook at the housing graph that we considered to start this discussion, it
seems that Dr. Shiller is suggesting that we’re headed back to the left side of
the graph. This would mean some sort of steady growth that really amounts to negligible growth.
While
this doesn’t seem very exciting for real estate sales (perhaps many of your are
feeling depressed by this analysis), I think it is great news for real estate recruiting.
Why? I'm out of time for now. I’ll share these thoughts in my next discussion.
Question: Do you belive the Dr. Shiller is correct? If so, how could this be good news for real estate recruiting?
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Editor's Note: This article was written by Ben Hess. Ben is the Founding Partner and Managing Director of Tidemark, Inc. and a regular contributor to WorkPuzzle.
