In mid October, noted economists Karl Case and Robert Shiller, partners in the real estate analysis firm Case Shiller Weiss, sat down in their Cambridge, Mass. offices to share some big picture insights about the current home market.
First, they offered some good news: Though they see appreciation rates slowing from last year's double-digit growth, most major markets should post respectable gains.
When talk turns to the prospect of a bubble, the duo acknowledge some sobering possibilities. "We are more vulnerable to a national housing bust than ever before," Shiller declares. That does not mean he thinks it will happen. Case also entertains some dire possibilities. "There's a bigger probability of a nasty free fall for a while than there's ever been," he agrees. "But I don't think that's going to happen, meaning I'd bet even odds against it."
Part of Case's reasoning is grounded in his belief that fundamentals like income growth and interest rates justify the strength of the home market in the late 1990's. "I'm not arguing there's no speculation now," he adds, "but somehow my gut tells me it's not as crazy as the Nasdaq at all, and there are at least some variables you can point to that make the home market more rational that it would otherwise seem."
Does that mean a buyer or owner shouldn't worry about appreciation or about a speculative episode? "Sure, you worry," says Case. "You're buying something with leverage, which multiplies the returns on the upside and the downside. Worrying about its value is rational." But Case adds that by his calculations, owning a house (as opposed to renting one) offers the home buyer a 7% return in what he terms "housing services." And it provides a host of tax advantages. And it's a durable good. And your money is sunk into a place where you can actually grill a hamburger and relax. Case himself owns a home in Wellesley, Mass, as well as lakefront property in New Hampshire. "Certainly in the last year I'm happier with my money there - even if it didn't appreciate (though it did) - than had my money been in my 401(k).
This illustrates an important point for Case: Though he believes real risks exist, he doesn't consider buying a house to be a wager on par with buying a stock. And to some extent, Shiller agrees. Indeed, Shiller, who is famously bearish, overcame his anxieties about spending a big chunk of money this past year and purchased a vacation home on an island off the Connecticut coast. To Case, this puts some of the talk of a bubble in perspective. "So here's one of the biggest pessimists in the world," he says, pointing to his partner and smiling. "And even he's buying a second home." |
