Robert Shiller – home prices could slide for 20 years?

[Rich Toscano]

[quote=briansd1]

Shiller is talking about real prices (vs nominal prices).

[/quote]

Brian, that’s the crucial issue — over 20 years there is a giant different between a fall in real vs. nominal terms.

However, while he was talking about real prices in his 10-25% drop prediction, he didn’t mention real prices when he said they could drop for 20 years. He just said home prices. And he used Japan (where they fell in nominal terms) as a justification for that prediction. So, I think his 20 year decline scenario was in nominal terms.

As pri_dk pointed out, Shiller seemed to be throwing that out as one of many possible scenarios, and probably not the most likely one, so the title of the interview is sensationalist.

Like TG I am a big Shiller fan (btw, thanks TG for the nice shout out). However, I think the idea that prices will drop for 20 years in NOMINAL terms is completely absurd.

Let’s just say that home prices don’t even fall for 20 years — let’s say that they stay the same. At 3% annual inflation compounding for 20 years, that would mean that after 20 years, the REAL value of housing had falling by 75%. To say that prices are actually declining for 20 years, take whatever that 20 year nominal decline is and add it to 75%, and that’s your real decline. That is exceedingly unlikely, to say the least.

The counterargument would be that Japan was in deflation and we too could go into a 20 year deflation, but for reasons I have discussed many times and in great depth, there is no chance that this will happen. No chance. And I think the 3% inflation figure used in the above calculation will almost certainly prove to be significantly low.

Shiller has done some excellent and important work on the topic of valuations and of market booms and busts, but he has his areas he focuses on and areas he doesn’t. Notably, he pays virtually no attention to the imbalances caused by our coming-apart-at-the-seams monetary system (except inasmuch as they have influenced the historical CPI, which to his credit he accounts for). Only by ignoring that topic could he predict a 20 year decline in the nominal price of housing. This blind spot is also imho why he is seeing bubbles where there are none (oil and gold) while ignoring the actual bubble (Treasuries — not really a greed-driven bubble in the traditional sense, but worlds closer to being an actual bubble than oil or gold).

[bearishgurl]

[quote=temeculaguy]…The trick are all the other variables when trying to determine the value of a single house and it’s current fair value and estimated future value. Sizes of houses have changed, some areas that were once far flung suburbs have grown up and have gained autonomy (ie. carlsbad/encinitas) so it get really hard to compare median priced 1970’s home purchase in encinitas, factor inflation since then and come to an estimated value for today. The water gets muddy, because the houses are bigger now, much bigger, and encinitas isn’t the same as it was 40 years ago…[/quote]

Good observation, TG. You mentioned “built-out” areas such as Manhattan in your post as being immune to how “mainstream” property values across the nation behave (correct me if I have this wrong.) I want to add other areas of the US to Manhattan and SF (and other very congested cities with much opportunity). They are some areas =< 5 miles from the CA coast and the (Pacific and Atlantic) coasts of other states and US resort areas such as isolated ski areas, etc. An area can be "built out" even if the average lot in it is 15K sf and it is zoned 3 units per AC max and apartment/condo units are no longer permitted on all affected parcel maps (ex: Bonita, CA). For instance, the average lot size in OB is about 6500 sf but it, along with many other coastal communities in SD County, is "built out." Mission Hills and Pt Loma are NOT coastal, but they are "built out," as are virtually ALL "metro" SD communities. The only way there would be land available for residential building in these communities would be to buy a lot where a previous owner has demolished a previous bldg or buy a "knockdown" bldg and demolish it yourself. If a desirable and convenient area is “built-out,” it is a finite commodity. Of course, “desirability” varies widely among the “built-out” communities within 5 miles of the bay or ocean in SD County but for the most part, I don’t see these areas being decimated, price wise. The amount of inventory in these areas which could be available and currently on the market has long been established. There is nothing location-wise to compete with these properties and never will be, except their neighboring available properties.

In the interior US, this isn’t so. Subdivisions the same age might be equal in value to a subdivision 60 miles away (ex. Houston, TX) if neither has access to neighborhood lakes or their own parkland, and each is equidistant to job centers. Here, there is no ocean, island, historical property, different topography or sufficiently “built-out” areas to suggest the values should be higher than other areas. The weather is basically the same for hundreds of miles around a subdivision there. In these interior areas, values hold steady and are more susceptible to the financial wherewithal of potential buyers. A typical buyer is not usually a relo, transplant or foreigner, as are many SD buyers, but a locally born individual/family from that county or an adjacent one. These areas’ value fluctuations, if any, are much easier to predict far into the future.

Not so in coastal CA. It is a different animal entirely. The properties are very diverse, the topography is diverse, the buyers are very diverse, the home styles and ages are diverse and the weather can be significantly different just 5 miles away. In trying to determine the “worth” of properties in this “coastal niche,” these properties shouldn’t compared to or confused with areas further inland which have multiple near-identical tracts, possible vacant land still available and many residents who may be entirely freeway-dependent. Scarcity of land/lots and convenience will always have a higher value, even if it is a vacant lot. Size of dwelling is secondary.

[bearishgurl]

[quote=temeculaguy]…The trick are all the other variables when trying to determine the value of a single house and it’s current fair value and estimated future value. Sizes of houses have changed, some areas that were once far flung suburbs have grown up and have gained autonomy (ie. carlsbad/encinitas) so it get really hard to compare median priced 1970’s home purchase in encinitas, factor inflation since then and come to an estimated value for today. The water gets muddy, because the houses are bigger now, much bigger, and encinitas isn’t the same as it was 40 years ago…[/quote]

Good observation, TG. You mentioned “built-out” areas such as Manhattan in your post as being immune to how “mainstream” property values across the nation behave (correct me if I have this wrong.) I want to add other areas of the US to Manhattan and SF (and other very congested cities with much opportunity). They are some areas =< 5 miles from the CA coast and the (Pacific and Atlantic) coasts of other states and US resort areas such as isolated ski areas, etc. An area can be "built out" even if the average lot in it is 15K sf and it is zoned 3 units per AC max and apartment/condo units are no longer permitted on all affected parcel maps (ex: Bonita, CA). For instance, the average lot size in OB is about 6500 sf but it, along with many other coastal communities in SD County, is "built out." Mission Hills and Pt Loma are NOT coastal, but they are "built out," as are virtually ALL "metro" SD communities. The only way there would be land available for residential building in these communities would be to buy a lot where a previous owner has demolished a previous bldg or buy a "knockdown" bldg and demolish it yourself. If a desirable and convenient area is “built-out,” it is a finite commodity. Of course, “desirability” varies widely among the “built-out” communities within 5 miles of the bay or ocean in SD County but for the most part, I don’t see these areas being decimated, price wise. The amount of inventory in these areas which could be available and currently on the market has long been established. There is nothing location-wise to compete with these properties and never will be, except their neighboring available properties.

In the interior US, this isn’t so. Subdivisions the same age might be equal in value to a subdivision 60 miles away (ex. Houston, TX) if neither has access to neighborhood lakes or their own parkland, and each is equidistant to job centers. Here, there is no ocean, island, historical property, different topography or sufficiently “built-out” areas to suggest the values should be higher than other areas. The weather is basically the same for hundreds of miles around a subdivision there. In these interior areas, values hold steady and are more susceptible to the financial wherewithal of potential buyers. A typical buyer is not usually a relo, transplant or foreigner, as are many SD buyers, but a locally born individual/family from that county or an adjacent one. These areas’ value fluctuations, if any, are much easier to predict far into the future.

Not so in coastal CA. It is a different animal entirely. The properties are very diverse, the topography is diverse, the buyers are very diverse, the home styles and ages are diverse and the weather can be significantly different just 5 miles away. In trying to determine the “worth” of properties in this “coastal niche,” these properties shouldn’t compared to or confused with areas further inland which have multiple near-identical tracts, possible vacant land still available and many residents who may be entirely freeway-dependent. Scarcity of land/lots and convenience will always have a higher value, even if it is a vacant lot. Size of dwelling is secondary.

[bearishgurl]

[quote=temeculaguy]…The trick are all the other variables when trying to determine the value of a single house and it’s current fair value and estimated future value. Sizes of houses have changed, some areas that were once far flung suburbs have grown up and have gained autonomy (ie. carlsbad/encinitas) so it get really hard to compare median priced 1970’s home purchase in encinitas, factor inflation since then and come to an estimated value for today. The water gets muddy, because the houses are bigger now, much bigger, and encinitas isn’t the same as it was 40 years ago…[/quote]

Good observation, TG. You mentioned “built-out” areas such as Manhattan in your post as being immune to how “mainstream” property values across the nation behave (correct me if I have this wrong.) I want to add other areas of the US to Manhattan and SF (and other very congested cities with much opportunity). They are some areas =< 5 miles from the CA coast and the (Pacific and Atlantic) coasts of other states and US resort areas such as isolated ski areas, etc. An area can be "built out" even if the average lot in it is 15K sf and it is zoned 3 units per AC max and apartment/condo units are no longer permitted on all affected parcel maps (ex: Bonita, CA). For instance, the average lot size in OB is about 6500 sf but it, along with many other coastal communities in SD County, is "built out." Mission Hills and Pt Loma are NOT coastal, but they are "built out," as are virtually ALL "metro" SD communities. The only way there would be land available for residential building in these communities would be to buy a lot where a previous owner has demolished a previous bldg or buy a "knockdown" bldg and demolish it yourself. If a desirable and convenient area is “built-out,” it is a finite commodity. Of course, “desirability” varies widely among the “built-out” communities within 5 miles of the bay or ocean in SD County but for the most part, I don’t see these areas being decimated, price wise. The amount of inventory in these areas which could be available and currently on the market has long been established. There is nothing location-wise to compete with these properties and never will be, except their neighboring available properties.

In the interior US, this isn’t so. Subdivisions the same age might be equal in value to a subdivision 60 miles away (ex. Houston, TX) if neither has access to neighborhood lakes or their own parkland, and each is equidistant to job centers. Here, there is no ocean, island, historical property, different topography or sufficiently “built-out” areas to suggest the values should be higher than other areas. The weather is basically the same for hundreds of miles around a subdivision there. In these interior areas, values hold steady and are more susceptible to the financial wherewithal of potential buyers. A typical buyer is not usually a relo, transplant or foreigner, as are many SD buyers, but a locally born individual/family from that county or an adjacent one. These areas’ value fluctuations, if any, are much easier to predict far into the future.

Not so in coastal CA. It is a different animal entirely. The properties are very diverse, the topography is diverse, the buyers are very diverse, the home styles and ages are diverse and the weather can be significantly different just 5 miles away. In trying to determine the “worth” of properties in this “coastal niche,” these properties shouldn’t compared to or confused with areas further inland which have multiple near-identical tracts, possible vacant land still available and many residents who may be entirely freeway-dependent. Scarcity of land/lots and convenience will always have a higher value, even if it is a vacant lot. Size of dwelling is secondary.

[bearishgurl]

[quote=temeculaguy]…The trick are all the other variables when trying to determine the value of a single house and it’s current fair value and estimated future value. Sizes of houses have changed, some areas that were once far flung suburbs have grown up and have gained autonomy (ie. carlsbad/encinitas) so it get really hard to compare median priced 1970’s home purchase in encinitas, factor inflation since then and come to an estimated value for today. The water gets muddy, because the houses are bigger now, much bigger, and encinitas isn’t the same as it was 40 years ago…[/quote]

Good observation, TG. You mentioned “built-out” areas such as Manhattan in your post as being immune to how “mainstream” property values across the nation behave (correct me if I have this wrong.) I want to add other areas of the US to Manhattan and SF (and other very congested cities with much opportunity). They are some areas =< 5 miles from the CA coast and the (Pacific and Atlantic) coasts of other states and US resort areas such as isolated ski areas, etc. An area can be "built out" even if the average lot in it is 15K sf and it is zoned 3 units per AC max and apartment/condo units are no longer permitted on all affected parcel maps (ex: Bonita, CA). For instance, the average lot size in OB is about 6500 sf but it, along with many other coastal communities in SD County, is "built out." Mission Hills and Pt Loma are NOT coastal, but they are "built out," as are virtually ALL "metro" SD communities. The only way there would be land available for residential building in these communities would be to buy a lot where a previous owner has demolished a previous bldg or buy a "knockdown" bldg and demolish it yourself. If a desirable and convenient area is “built-out,” it is a finite commodity. Of course, “desirability” varies widely among the “built-out” communities within 5 miles of the bay or ocean in SD County but for the most part, I don’t see these areas being decimated, price wise. The amount of inventory in these areas which could be available and currently on the market has long been established. There is nothing location-wise to compete with these properties and never will be, except their neighboring available properties.

In the interior US, this isn’t so. Subdivisions the same age might be equal in value to a subdivision 60 miles away (ex. Houston, TX) if neither has access to neighborhood lakes or their own parkland, and each is equidistant to job centers. Here, there is no ocean, island, historical property, different topography or sufficiently “built-out” areas to suggest the values should be higher than other areas. The weather is basically the same for hundreds of miles around a subdivision there. In these interior areas, values hold steady and are more susceptible to the financial wherewithal of potential buyers. A typical buyer is not usually a relo, transplant or foreigner, as are many SD buyers, but a locally born individual/family from that county or an adjacent one. These areas’ value fluctuations, if any, are much easier to predict far into the future.

Not so in coastal CA. It is a different animal entirely. The properties are very diverse, the topography is diverse, the buyers are very diverse, the home styles and ages are diverse and the weather can be significantly different just 5 miles away. In trying to determine the “worth” of properties in this “coastal niche,” these properties shouldn’t compared to or confused with areas further inland which have multiple near-identical tracts, possible vacant land still available and many residents who may be entirely freeway-dependent. Scarcity of land/lots and convenience will always have a higher value, even if it is a vacant lot. Size of dwelling is secondary.

[bearishgurl]

[quote=temeculaguy]…The trick are all the other variables when trying to determine the value of a single house and it’s current fair value and estimated future value. Sizes of houses have changed, some areas that were once far flung suburbs have grown up and have gained autonomy (ie. carlsbad/encinitas) so it get really hard to compare median priced 1970’s home purchase in encinitas, factor inflation since then and come to an estimated value for today. The water gets muddy, because the houses are bigger now, much bigger, and encinitas isn’t the same as it was 40 years ago…[/quote]

Good observation, TG. You mentioned “built-out” areas such as Manhattan in your post as being immune to how “mainstream” property values across the nation behave (correct me if I have this wrong.) I want to add other areas of the US to Manhattan and SF (and other very congested cities with much opportunity). They are some areas =< 5 miles from the CA coast and the (Pacific and Atlantic) coasts of other states and US resort areas such as isolated ski areas, etc. An area can be "built out" even if the average lot in it is 15K sf and it is zoned 3 units per AC max and apartment/condo units are no longer permitted on all affected parcel maps (ex: Bonita, CA). For instance, the average lot size in OB is about 6500 sf but it, along with many other coastal communities in SD County, is "built out." Mission Hills and Pt Loma are NOT coastal, but they are "built out," as are virtually ALL "metro" SD communities. The only way there would be land available for residential building in these communities would be to buy a lot where a previous owner has demolished a previous bldg or buy a "knockdown" bldg and demolish it yourself. If a desirable and convenient area is “built-out,” it is a finite commodity. Of course, “desirability” varies widely among the “built-out” communities within 5 miles of the bay or ocean in SD County but for the most part, I don’t see these areas being decimated, price wise. The amount of inventory in these areas which could be available and currently on the market has long been established. There is nothing location-wise to compete with these properties and never will be, except their neighboring available properties.

In the interior US, this isn’t so. Subdivisions the same age might be equal in value to a subdivision 60 miles away (ex. Houston, TX) if neither has access to neighborhood lakes or their own parkland, and each is equidistant to job centers. Here, there is no ocean, island, historical property, different topography or sufficiently “built-out” areas to suggest the values should be higher than other areas. The weather is basically the same for hundreds of miles around a subdivision there. In these interior areas, values hold steady and are more susceptible to the financial wherewithal of potential buyers. A typical buyer is not usually a relo, transplant or foreigner, as are many SD buyers, but a locally born individual/family from that county or an adjacent one. These areas’ value fluctuations, if any, are much easier to predict far into the future.

Not so in coastal CA. It is a different animal entirely. The properties are very diverse, the topography is diverse, the buyers are very diverse, the home styles and ages are diverse and the weather can be significantly different just 5 miles away. In trying to determine the “worth” of properties in this “coastal niche,” these properties shouldn’t compared to or confused with areas further inland which have multiple near-identical tracts, possible vacant land still available and many residents who may be entirely freeway-dependent. Scarcity of land/lots and convenience will always have a higher value, even if it is a vacant lot. Size of dwelling is secondary.

[moneymaker]

Great post TG, you really should start your own blog somewhere, I would read it. I do see a scenario where home prices stay low for a long time. All it takes is long term unemployment, slowly but steadily rising interest rates, or another depression like double dip. If World War 2 had not pulled us out of the first depresssion who knows how long recovery may have taken.
Bearishgurl I think the weather is actually better 5 miles inland than it is at the beach, I would think that anyone that has lived in both would agree. Shiller is not in my book living in an ivory tower, he is very down to earth.

[moneymaker]

Great post TG, you really should start your own blog somewhere, I would read it. I do see a scenario where home prices stay low for a long time. All it takes is long term unemployment, slowly but steadily rising interest rates, or another depression like double dip. If World War 2 had not pulled us out of the first depresssion who knows how long recovery may have taken.
Bearishgurl I think the weather is actually better 5 miles inland than it is at the beach, I would think that anyone that has lived in both would agree. Shiller is not in my book living in an ivory tower, he is very down to earth.

[moneymaker]

Great post TG, you really should start your own blog somewhere, I would read it. I do see a scenario where home prices stay low for a long time. All it takes is long term unemployment, slowly but steadily rising interest rates, or another depression like double dip. If World War 2 had not pulled us out of the first depresssion who knows how long recovery may have taken.
Bearishgurl I think the weather is actually better 5 miles inland than it is at the beach, I would think that anyone that has lived in both would agree. Shiller is not in my book living in an ivory tower, he is very down to earth.

[moneymaker]

Great post TG, you really should start your own blog somewhere, I would read it. I do see a scenario where home prices stay low for a long time. All it takes is long term unemployment, slowly but steadily rising interest rates, or another depression like double dip. If World War 2 had not pulled us out of the first depresssion who knows how long recovery may have taken.
Bearishgurl I think the weather is actually better 5 miles inland than it is at the beach, I would think that anyone that has lived in both would agree. Shiller is not in my book living in an ivory tower, he is very down to earth.

[moneymaker]

Great post TG, you really should start your own blog somewhere, I would read it. I do see a scenario where home prices stay low for a long time. All it takes is long term unemployment, slowly but steadily rising interest rates, or another depression like double dip. If World War 2 had not pulled us out of the first depresssion who knows how long recovery may have taken.
Bearishgurl I think the weather is actually better 5 miles inland than it is at the beach, I would think that anyone that has lived in both would agree. Shiller is not in my book living in an ivory tower, he is very down to earth.

[gandalf]

Nice post, TG. I also think Shiller’s great. Not ivory tower, down to earth.

What Rich said, that’s what I think too. Housing prices may well continue to decline on a real basis but I don’t see a long-term slide like Japan.

Mainly because I think something has to give on the U.S. currency side. Not sure when or how, gradual or sudden, but something has to give.

Also, I think energy issues will kick in eventually and make everything else seem inconsequential, possibly in a good way.

[gandalf]

Nice post, TG. I also think Shiller’s great. Not ivory tower, down to earth.

What Rich said, that’s what I think too. Housing prices may well continue to decline on a real basis but I don’t see a long-term slide like Japan.

Mainly because I think something has to give on the U.S. currency side. Not sure when or how, gradual or sudden, but something has to give.

Also, I think energy issues will kick in eventually and make everything else seem inconsequential, possibly in a good way.

[gandalf]

Nice post, TG. I also think Shiller’s great. Not ivory tower, down to earth.

What Rich said, that’s what I think too. Housing prices may well continue to decline on a real basis but I don’t see a long-term slide like Japan.

Mainly because I think something has to give on the U.S. currency side. Not sure when or how, gradual or sudden, but something has to give.

Also, I think energy issues will kick in eventually and make everything else seem inconsequential, possibly in a good way.

[gandalf]

Nice post, TG. I also think Shiller’s great. Not ivory tower, down to earth.

What Rich said, that’s what I think too. Housing prices may well continue to decline on a real basis but I don’t see a long-term slide like Japan.

Mainly because I think something has to give on the U.S. currency side. Not sure when or how, gradual or sudden, but something has to give.

Also, I think energy issues will kick in eventually and make everything else seem inconsequential, possibly in a good way.

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