If the housing crisis wasn’t enough to turn you off of buying real estate, listen to economist Robert Shiller: Houses are poor investments, and they pretty much always have been. Shiller was one of three economists to win a Nobel Prize on Monday “for their empirical analysis of asset prices.” He is famous for predicting—in his book “Irrational Exuberance”—that the real estate bubble would burst long before the crash. The Atlantic Cities reports:
Yale economist Robert Shiller won a Nobel prize on Monday (or, rather, a third of one) for his work suggesting that financial markets might not always be quite as efficient as we think, in large part due to human miscalculation about the value of assets….
The New York Times’ David Leonhardt has the most digestible summary here of Shiller’s long career:
‘Boiled down, Mr. Shiller’s central insight is that people make mistakes – and they tend to make the same mistakes over and over.’
In the many realms where we make said mistakes, the housing market now stands out as a big one (the Nobel prize committee actually mentioned the single-family house in awarding part of the prize this year to Shiller).
Conventional wisdom says our own homes are a great place to invest money because the value of a house will inevitably appreciate. One of Shiller’s most eye-popping findings actually says quite the opposite: Historically, between 1890 and 1990, the actual rate of return on owning a home has been virtually non-existent. We think housing is a great investment. Shiller says it’s not.
Here he is predicting the fall of housing prices to Leonhardt in 2005:
‘This is the biggest boom we’ve ever had. So a very plausible scenario is that home-price increases continue for a couple more years, and then we might have a recession and they continue down into negative territory and languish for a decade.’
Here he is discouraging people from investing in housing on CNNMoney in 2007:
‘Well, human thinking is built around stories, and the story that has sustained the housing boom is that homes are like stocks. Buy one anywhere and it’ll go up. It’s the easiest way to get rich… It can’t be true that homes rise 10 percent a year. If they did, in the long run no one would be able to afford a house.’
Here he is talking to Bloomberg TV just this February, looking back on the idea that housing should be treated as a sure-fire investment:
‘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.’
There you have it, people, loud and clear. If everyone’s telling you to purchase a house because it’s such a sound investment, as people tend to, just quote some of Shiller’s many warnings against it. And whatever you do, don’t buy a house. That is unless, as Atlantic Cities staff writer Emily Badger points out, “you don’t want to deal with a landlord [or] you want the freedom to remodel your bathroom.”
Even before the housing crisis, owning your own home produced a “virtually nonexistent” return, according to Robert Shiller.