Is Shiller Right?

The quote below is from Jim Randel, a real estate expert and author on many topics real estate and money related.  He presents a chart created by Robert Schiller in 2005.  The chart is interesting and my interprepation of the chart follows (I responded to Jim via email).  It is food for thought in this mad, mad, mad real estate world.

 

 

 

 

 

“Since I hold myself out as a real-estate expert, the question that people are always asking me is “how much lower?”    In other words, how much lower will housing prices go before they hit bottom?
 
Here is what this chart tells us:  that from 1890 through 1950, excepting the World War I and II periods, housing prices stayed within a fairly narrow range (adjusted for inflation).  As you can see, in the year 2000 housing values were only about 10% above Shiller’s benchmark (1890 values).  But then look at what happened in 2000!!
 
In just five years or so, prices doubled – fueled as we all know by a nasty cocktail of greed, bad lending, hyper-low interest rates, and an unquestioning belief in the premise that housing prices always go up. 
 
So where are housing prices headed??  Well the dotted line on this chart shows you one interpretation of how much further prices have to fall:  another 30% or so before they reach year 2000 levels and a point of seeming equilibrium (based on a 110-year history).
 
Don’t ruin your day by looking at the graph’s location in the “Great Depression” period (1920 – 1940).  I would argue that stretch is an aberration.  From 1950 – 2000, housing prices were pretty stable.
 
By the way, here is how Shiller describes what happened between 2000 – 2006 … sound familiar??”

“Irrational exuberance is the psychological basis of a speculative bubble … a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases and bringing in a larger and larger class of investors, who, despite doubts about the real value of an investment, are drawn to it partly through envy of others successes and partly through a gambler’s excitement.”     
Well, of course, I don’t know, but the chart below, produced by economist Robert Shiller and excerpted from his book, Irrational Exuberance (Doubleday, 2d Edition, 2005) shows you what many economists think.

 shiller

 

Jim, 

Craig Goebbel from Real Estate Radio, here.  I don’t want to argue with your interpretation about another 30% drop in home values but I have a different perspective from the very same chart.  Note that since 1950 there is a floor of support above $105,000.  Why?  I would argue it is a result of more efficient markets, the consistent availability of 30-year fixed rate mortgages and a growing population.  The other factor is the increased cost to build new homes due to the myriad of fees associated with a new home and developing its building site.

 

So, my interpretation is we are at the bottom overall, with some pain still on its way for some regions around the country. 

 

I am not an economist but if you want four opinions on the economy, ask three economists.

 

Craig E. Goebbel

craig@craiggoebbel.com

206-601-9824 – Mobile

253-906-5626 – Mobile

 

Jim is a good guy to follow and you can find him at www.jimrandel.com.

One thought on “Is Shiller Right?”

  1. Good morning Craig.
    Thanks for the invitation to the conversation.
    What a fun question to ask an economist. “Where is the bottom?”
    A very simple approach is to look to the past.
    Does the past predict the future? Some say it does.
    I suspect it can; however, we cannot overlook the wide and varied
    availability of media and instant communication.
    Now, back to the future. What happens to the chart when we
    consider the rapid swelling of our population?
    The biggest savers in the last 100 years are passing on a bit of money
    to the biggest spenders. Where will they put this money?
    Our good friends at the Fed seem to have something to do with the cost of money.
    The cost and amount of money in circulation within this fiat system is not up to
    “We the people”. It is up to the Federal Reserve Bank.
    So, since “We the people” have so little to say about the variables we might consider
    the basics:
    1. No more land is being made (except in Dubai)
    2. Most people will seek some sort of controllable shelter.
    3. People are living longer while more people are being born and immigrating.
    4. Affordability index is pretty enticing.
    5. All things tend to cycle.

    Conclusion: ( Illinois farm boy style) …and to those of you who would like
    to correct my spelling or diction, refer to my good friend Mark Twain for advice.
    Media is like the birds on the plains of Africa that alert the monkeys to new info.
    So, as the effects of this affordability index coupled with effects of the $8k tax credit
    get reported in the quarterly housing reports, the heard will start to move.
    Someone has to lead the heard and these are the entrepreneurs. I think a good bit
    of foreign money is being used in various parts of the country now to buy up good properties. As news gets out about the shrinking inventory, affordability index and
    control, afforded by ownership, the heard will start to move. Motion tends to want
    to stay in motion until acted upon by an equal or greater force….interest rates?

    Simple farm boy logic which lead to prognostications:
    A. I can rent a house, but rent may go up and I get no write offs or control.
    B. I can own that same home for nearly the same cost as rent with some advantage:
    1. I can paint it in zebra stripes if I so choose.
    2. My payment won’t go up-except for ins. and property tax.
    3. I can write-off most of the payment (which causes affordability)
    4. If I live long enough, I might be able to pay it off.
    5. I could buy another one and rent the other one and let tenants pay it off.
    6. There are some zero down programs still being offered.

    * This logic is only valid if you have a job and pay your bills.
    There at least 3 zero down programs in Snohomish County.

    P.S. “The bottom” has already been discovered in many places throughout the
    U.S. Here in the Puget sound area, we will find it by fall 2009.

    Lee Gallaher owns Gallaher Real Estate in Mukilteo Wa. and has been know
    to have opinions.

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