Monday, April 15, 2013

Great NY Times Article - Why Home Prices Change (or Don't)

On Sunday, Robert J. Shiller wrote a must read article in the Times, Why Home Prices Change (or Dont').

Every type of real estate professional should understand the economics behind residential housing and this article objectively lays out the facts. Plus, if you don't know, Mr. Shiller's credentials include being a Professor of Economics at Yale - so pay attention to what he has to say.

The article looks at the economics of residential housing and compares this investment vehicle to stocks. Most importantly, it looks at last year's gains in housing and explains that its not a predictor for the next 10 years in growth and should only be viewed in terms of just being a growth for last year.

As the article states: "Over the 100 years ending in 1990- before the recent housing boom - real home prices rose only 0.2 percent a year, on average". Mr. Shiller explains that while it may psychologically feel like prices keep going up, one must look at prices after correcting for inflation. In such, there is not much growth in the long term.

So, real estate professionals, houses are a good buy if you want to live there. They may be good if you add money to the house through construction. Yet, if you want to buy, hold and not invest in a product, do not buy a house.