Why Land May Not Be the Smartest Place to Put Your Nest Egg

Buy land: They’re not making it anymore. That often repeated adage sounds like good financial advice.

But over the long run, it hasn’t been. Despite solid price increases over the last few years, land and homes have actually been disappointing investments. It’s worth considering why.

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Before Housing Bubbles, There Was Land Fever

SINCE 1997, we have lived through the biggest real estate bubble in United States history — followed by the most calamitous decline in housing prices that the country has ever seen.

Fundamental factors like inflation and construction costs affect home prices, of course. But the radical shifts in housing prices in recent years were caused mainly by investor-induced speculation.  

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Reviving Real Estate Requires Collective Action

IMAGINE that you are watching an outdoor theater production while sitting on the grass. You have difficulty seeing, so you prop yourself up on your knees. Soon everyone behind you does the same. Eventually, most people are kneeling or standing, yet they are less comfortable than they were before and have no better view. Everyone should sit down, and everyone knows it, but no one does.

This is a collective action problem, a phenomenon that is, unfortunately, all too common. At the moment, the trouble in our real estate markets and the drag these markets are placing on our entire economy may be understood as a collective action problem. In a nutshell, mortgage lenders need to write down the amounts owed by individual homeowners — that is, let everyone sit down and relax — but the different stakeholders have been unable to reach an agreement, even if it is in their common interest.

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The Sickness Beneath the Slump

THE origins of the current economic crisis can be traced to a particular kind of social epidemic: a speculative bubble that generated pervasive optimism and complacency. That epidemic has run its course. But we are now living with the malaise it caused.

News accounts of the economic crisis rarely put it in these terms. They tend to focus on distinct short-term developments or on the roles of prominent people like Federal Reserve governors, members of Congress or Wall Street financiers. These stories grab attention and may be supported by some of the economic statistics that the government and private institutions collect.

But the economic situation is primarily driven by hard-to-quantify sociological factors that play out over many years.

The uptick in the unemployment rate, to 9.1 percent from 8.8 percent two months earlier and the drop in stock prices over the last month have attracted notice, yet in a sense they are symptoms of a deeper economic sickness.

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Economic View: Mom, Apple Pie and Mortgages

By Robert J. Shiller in the NY Times:

FOR decades, the federal government has subsidized housing — particularly owner-occupied housing. This has been especially true during the continuing financial crisis, with Fannie Mae, Freddie Mac and the Federal Housing Administration propping up the housing market by issuing guarantees for investors on most new mortgages.

But what is the long-term justification for putting taxpayers on the line to subsidize homeownership? Is this nothing more than a sacred cow in American society — a political necessity because so many voters own homes and are mindful of their resale value?

In fact, there is much more to the history of subsidizing housing. While the crisis in the housing market shows that our current approach is far from perfect, there is a certain wisdom behind it, related not only to economic stimulus but also to the preservation of a sense of national identity. It’s important to remember this as we consider re-engineering our institutions as the crisis ebbs.

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Economist Robert Shiller: “Homebuyers are a little optimistic about home prices”

View article/video on the FrontDoor Real Estate Blog

Unlearned lessons from the housing bubble

From the Gulf Times:

By Robert J Shiller/New Haven, US

There is a lot of misunderstanding about home prices. Many people all over the world seem to have thought that since we are running out of land in a rapidly growing world economy, the prices of houses and apartments should increase at huge rates.

That misunderstanding encouraged people to buy homes for their investment value – and thus was a major cause of the real estate bubbles around the world whose collapse fuelled the current economic crisis. This misunderstanding may also contribute to an increase in home prices again, after the crisis ends. Indeed, some people are already starting to salivate at the speculative possibilities of buying homes in currently depressed markets.

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Q&A: Yale's Robert Shiller on the Outlook for Home Prices

From TIME:

If you want to know what's going on in the U.S. housing market, chances are you follow the Case-Shiller index. Robert Shiller, the Yale University economist who helped create the home-price gauge, was something of a pop economist even before the real estate meltdown—a book published in 2000 warning about the coming crash in stocks made him a rock star of the last bubble, too. His latest book, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters For Global Capitalism, was written with Univeristy of California, Berkeley economist George Akerlof. Shiller spoke with TIME's Barbara Kiviat.

Policies to Deal with the Implosion in the Mortgage Market

By Robert J. Shiller from The B.E. Journal of Economic Analysis & Policy:

This paper relates the 2006-2008 meltdown in mortgage markets to falling asset prices, excessive psychological reaction to the burst bubble, and new mortgage vehicles incapable of accommodating sudden changes in asset values. A combination of market-based and regulatory innovations are proposed. The paper suggests placing greater reliance on innovative futures markets in real estate, inducing the flow of capital to vehicles having self-regulatory features and cultivating resiliency in the market.

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Transcript: U.S. Economist Robert Shiller Prescribes 'More Derivatives'

From Radio Free Europe/Radio Liberty:

He was one of the few people to accurately predict the bursting of not one but two financial "bubbles." The dot-com collapse in technology stocks at the beginning of the decade, and the U.S. housing-market collapse that triggered the current economic crisis. So when Yale professor Robert Shiller comes up with suggestions for a way forward, they're likely worth hearing. One is about derivatives, the complex financial instruments -- many based on mortgages -- that were blamed for fueling the crisis. Shiller's prescription: not fewer derivatives, but more of them. RFE/RL's Kathleen Moore asked him why.

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