Today’s foray includes delving into a great article written about a new book by Robert J. Shiller. The book looks at the paralells between the dot bomb bust and the upcoming real estate market bust. Some great quotes from this article include:
1. “There are always popular explanations for real estate booms, but “popular” doesn’t mean ‘correct.’”
2. “The notion that home prices always go up is very strong, and very wrong. ”
3. “The increase in home prices since 1980 in Los Angeles has really not been so much larger than in Milwaukee. But Los Angeles has gone through two booms and a crash along the way.”
I also had a discussion with one of my professors last night (from my MBA program) about the link between incomes and prices of goods. One statement that backs up this thinking on a statement by Robert Shillers is as follows: “In fact, the theoretical argument that home prices can be expected to appreciate faster than consumer prices in general isn’t strong. Technological progress in the construction industry may proceed faster than in other sectors. Barbers and teachers and lawyers are doing things more or less as they always have, but new materials, new equipment and prefabrication help make housing cheaper. ”
Therefore, just as transistors made radios cheaper, and new technology made DVD players cheaper, houses can be built cheaper than they were in real money terms. What’s more, underlying fundamentals provide a cap on the amount that houses can cost. People cannot spend what they do not make. I propose that the most recent runup in Southern California is brought on in part by easy credit (not lower interest rates), and in part by speculation. The greater availability of homes to people that ought not be buying homes has increased prices on the one hand, and those profiting from the increase has driven it higher. Worried that they might “miss out”, others have rushed in, using the more generous (and risky) financing to afford even more.
