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Robert Shiller: Don’t Invest in Housing

Robert Shiller of Yale was on Bloomberg yesterday discussing housing and his general outlook. But the most interesting comments were with regards to his general view of housing as it pertains to your overall portfolio. Shiller said that investing in housing was a “fad” and not a great historical investment. Of course, if you’re familiar with his long-term real returns chart  (see the chart in #9 here) housing generally generates returns that are in-line with inflation. US residential real estate just isn’t a great investment in real terms. Shiller explains why:

“Housing is 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, the 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.

…From 1890 to 1990 the appreciation in US housing was just about zero.  That amazes people, but it shouldn’t be so amazing because the cost of construction and labor has been going down.

…They’re not really an investment vehicle unless you want it for your personal reasons.”

This is a contentious debate.  In strict economic terms housing is viewed as investment and not consumption.  That’s why the BLS doesn’t include house prices in the CPI.  Even though housing includes fixed investment, you’re really consuming your house over the course of many years so there’s elements of both consumption and investment in housing.  The reasoning Dr. Shiller uses here is a big part of the consumption.  A house is a depreciating asset even though the land might not be.

Obviously, there are a lot of moving parts here and I am not sure I completely agree with Dr. Shiller.  Well run rental properties and commercial properties can be good investments, but most of us are living in our homes.  We’re consuming our home one day at a time and hoping that the scarcity of housing and land will result in prices outperforming inflation.  But there’s a flaw in that thinking also.  Because housing is such a large portion of most people’s expenses it has a very close connection with wages which have a very close connection with inflation.  So it’s not surprising to see house prices revert to the mean when they diverge from the annual rate of inflation – in general, that’s a sign that prices aren’t supported by incomes.

Personally, I prefer to think of a house as a place that provides intangible benefits and not investment benefits.  You buy a house because it puts a roof over your head.  You buy a house to live in it, not to invest in it.  But, like commodities, housing has become its own “asset class” that Wall Street has packaged up and sold to the American public as an equivalent to buying 500 of the best companies in the world (the S&P 500).   Most people also don’t invest in the stock market, but that’s a different discussion….I wouldn’t go so far as to say that real estate can’t be a good investment for some people (mostly experts), but for most of us the odds are that “investing” in real estate is not the right way to think about things.

I’d love to hear reader thoughts on this topic….


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