Popping the money illusion bubble
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That’s right, you heard it from the lips of the great home pricing guru himself, Robert Shiller. Yes, that is the Robert Shiller, co-creator of the Case-Shiller Home Price Indexes and Distinguished Professor of Economics at Yale University.
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According to Shiller, real estate is not an investment that produces any guaranteed capital gain, as it is a depreciating asset. Shiller acutely identifies the money illusion that most Californians hold regarding the myth that real estate is a perpetually appreciating asset, which always produces a return on investment (ROI). This myth, as first tuesday has critiqued for many years, is improperly propagated by real estate professionals and unfortunately believed with implicit credulity by real estate buyers and sellers.
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About The Author
Jeffery Marino
is an assistant editor and lead on our first tuesday news alerts, specializing in critical economic analysis and its impact on California’s real estate market.
The proposition that a home isn’t an investment is dead and buried deep within the Tax Code. Interest you pay on loans to buy your home is deductible from your ordinarty income just like the interest you pay on loans to buy and run a business, any business, is a legitimatedeductible expense. The Tax Code recognizes what some academics refuse to see: Your home IS an investment in a business – the business of keeping your kids and your dog out of the rain.
Califleurnia has the best weather on earth, and lots more attractions. Thank the electorate for choosing year after year raw nuts and green fruits to govern us into penury. This is the one thing that keeps the rest of the planet from invading us – and sends more and more of us each year to Texas and Nevada and wherever. But Califleurnia real estate is an investment if you do it right, especially in times of return-free risk such as these. It’s the Califleurnia, not the money, illusion…
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His analysis ignores the rental value of a home. It has rental value, whether it is occuied by a tenant or the owner. If you buy a home that goes up with inflation while generating a rental income that goes up with inflation, it can be a pretty good investmant. If you buy a home with a small down payment and the rental value is comparable to the mortgage payment that 2% appreciation can easily become a 20%+ annual increase in equity.
Any asset is too expensive at some price. Still any investor who purchase real estate in a non bubble period of time will usually come out very well if the the property is held for an extended period of time.
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Yes but the secret is investors are still buying in a good and a bad economy buying notes, flipping paper back and forth to other investors and/or still buying physical property. And not just sitting back waiting for a regular retail buyer. So there is still money to be made.
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It seems there is a budding fervor building in our local markets here in the Southbay and Long Beach areas. Properties are scooped up fairly quickly. First Tuesday keeps stating that investors expect to turn a profit in 2-3 years, but perhaps the prime reason for buying is for rental income, not flipping?
After all, with a stock market that is robbing the public blind, banks that pay .01 % (one one-hundredth of one percent) on money market accounts and CDs, and slipping emerging market returns, the best possible investment is housing!
For anyone with the means or ability to procure a loan, it would be absurd NOT to buy property at this time. Even if values drop, rents would probably rise or at least stay the same with so many losing homes in foreclosures.
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According to Shiller and First Tuesday then, shelter can’t be an investment because bubbles, i.e., “man-made market phenomena” is a major factor in driving home prices? Doesn’t “man-made market phenomena” affect all investments? Isn’t an investment in any company impacted by the man-made market for the product it makes (iPads, make-up, tractors, etc.)? Isn’t that why companies spend so much on marketing?
As Norm commented, a great return can be made by leveraging a small down payment on housing that appreciates at the rate of inflation.
Also, while it’s true that the “fickle market” shouldn’t be the only voice to consider, it should be a major factor in deciding when to buy and sell. I think it’s better to buy when the fickle market results in low prices and interest rates, than to buy when it has driven prices to a bubble.
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I think Mr. Shiller is making a distiction between two fundamental ideas/reasons people buy/sell homes. Each ligit in their own right, each governed by their own set of rules, laws, application, uses, and reasons for existing. And, one should be clear with themselves, at least, why they are selling/buying a home/investment/etc.
The beauty of real estate is the flexibility one has in moving from one intent/purpose to the other as the need/desire/opportunity arises. As with all things, real estate is open to interpretation as a commodity/resource/both according to the intentions of the individual involving themselves in the buying/selling thereof. I think the main idea here is for one to be sure/clear within oneself, and with others ( as far as one must be to create a legal contract) as to ones intentions/reasons for involving themselves with real estate/the real estate market, which can be, and often is, two seperate ideas/forces/realities.
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