Lead Story…. Nobel Laureate Robert Shiller wrote a piece in the NY Times this weekend titled: Why Land and Homes Actually Tend to Be Disappointing Investments that caught my eye. In the article, Professor Shiller discusses both farmland and residential land and makes a case they are both subpar investments over time (highlights are mine):
Over the century from 1915 to 2015, though, the real value of American farmland (deflated by the Consumer Price Index) increased only 3.1 times, according to the Department of Agriculture. That comes to an average increase of only 1.1 percent a year — and with a growing population, that’s barely enough to keep per capita real land value unchanged.
According to my own data (relying on the S&P/Case-Shiller U.S. National Home Price Index, which I helped create), real home prices rose even more slowly over the same period — a total increase of 1.8 times, which comes to an average of only 0.6 percent a year.What all that amounts to is that neither farmland nor housing has been a great place to invest money over the long term.
To put this in perspective, note that the real gross domestic product in the United States grew 15.5 times — or, on average, 3.2 percent a year — from 1929, the year official G.D.P. numbers began to be kept, to 2015. That’s a much higher growth rate than for real estate. But why? For home prices, a good part of the answer comes from supply and demand. As prices rise, companies build more houses and the supply floods the market, keeping prices down.
The supply response to increasing demand may help explain why real home prices nationwide fell 35 percent from 2006 to 2012 (and even more in some cities). Investment in residential structures in the United States was at near-record levels as a percentage of G.D.P. just before the price declines. Prices have been rebounding since then — and so has construction of new houses.
While the idea of supply and demand balancing out the housing market makes perfect sense from a textbook economic perspective, it quickly falls apart when you take into account the most local of all factors that has quite possibly the largest impact on both land and home prices: politics. Essentially, there are two primary restrictions to developing more residential units. The first is geographical. This includes mountains, bodies of water and scarcity of available water resources for new units. The second is political. This includes restrictive zoning, discretionary approval rights, etc.
Shiller’s analysis is perfect for markets with little to no geographical restrictions and even fewer political restrictions. For example, land and home prices are incredibly stable in a place like Houston, Texas where new homes can be added quickly. However, it fits poorly in coastal California which is hemmed in by mountains and the pacific ocean, has incredibly restrictive zoning and a populace with political leanings typically hostile to new development. I was a bit surprised that Shiller wrote this piece as he knows what I just wrote better than anyone. In fact, the Case Shiller Index that bears his name tracks housing prices in individual cities and backs up what I just wrote. For example, look no further than the difference between the Case Shiller Chicago Index (the don’t track Houston) and the Case Shiller San Francisco Index to see how land use restrictions can lead to explosive moves in asset pricing when coupled with real economic growth.
Shiller goes on to explain how adding density keeps land and housing prices stable over time (highlights are mine):
Of course, underneath every home is a piece of land. Although that is typically only a bit of former farmland, it is often in an urban or suburban area, where a plot of land tends to cost much more than in the country.
Sometimes that little piece of land dominates the value of the home, particularly in dense urban areas. But if we are to understand long-term trends, we need to realize what land represents, even in Manhattan or Silicon Valley or any booming area. People in such places usually aren’t buying land for its own sake but for the myriad services that housing provides. A home is not just a place to sleep and store clothing and keepsakes. It can be a place that is convenient to a stimulating place of work, good schools and entertainment and, indeed, part of an entire human community.
These services have developed enormously over the last 100 years, changing the spatial and geographic dimensions of housing. There are vastly more highways and automobiles, telephones and various electronic connections, enabling people to leave center cities and still obtain the housing services they want. Thus, from a long-term perspective, these developments relieved a great deal of the upward pressure on home prices in cities.
Right now, there are some interesting developments in the supply of housing services that economize even further on urban land. We have recently seen interest in “micro-apartments,” which may be little more than 200 square feet but manage to squeeze in a kitchen, a bathroom and an entertainment center. For many people, this tiny space, with its proximity to like-minded people, interesting neighborhoods and restaurants, is preferable to living in a house in a far-flung suburb. Carrying this idea further, keepsakes can be kept in remote storage, maybe deliverable someday, on demand, with driverless cars. Already, rules are being changed in many cities, including New York, allowing the little apartments to be built and to accommodate many more people per acre of city land. These factors could lead to near-zero future demands on valuable urban land.
First off, micro-units are wonderful as a means to drive housing prices down for those wishing to live in a high-priced urban area IF AND ONLY IF YOU ARE ACTUALLY ABLE TO GET APPROVALS TO BUILD THEM. Clearly Professor Shiller has not attempted to get such a micro-unit development approved in a wealthy, coastal region of California – say Orange County, for example. If a developer were to propose such a thing in a high-priced neighborhood, he’d be run out of town on a rail or worse for even daring to bring it up. This type of concept that works great in some places (cities without restrictive zoning and economics text books) and not at all in others (pretty much every major city on the west coast and a few on the east coast as well). In addition, adding density typically results in INCREASING underlying land values rather than causing them to fall. Please note that I’m not disagreeing with Shiller as to the premise of his article from a strictly economic perspective (at least when it comes to homes – not necessarily land) only noting that politics MUST BE taken into account because they play such an out-sized role in some regions.
I am far from an uber-bull when it comes to housing prices. Trees don’t grow to the sky and asset values can go up in a straight line for an extended period of time. That line of thinking has been fully debunked by the debacle that was the housing crash and Great Recession. IMO, one buys a house for stability and as a hedge against future rising rents, especially in supply constrained regions. If you are looking at a house soley as a means of making a large return on investment, you are doing it wrong. Unlike say tech stocks, housing is a necessity. Therefore the only way to properly judge it as an investment is versus the alternative: renting. You either do better over time as a renter or an owner depending largely on economic and political factors where you live. All real estate is local and making broad generalizations about housing supply being able to meet demand regardless of location and political climate is next to impossible even for an economist as accomplished as Shiller.
Bass Ackwards: How negative interest rates have turned the world’s economy upside down.
Delay: Britain has now pushed the projected date of the Brexit back to 2019. The odds of this thing actually occurring are falling by the day.
Reaching: Someone published a research note on Seeking Alpha theorizing that the Pokemon Go app will lead to higher oil prices. Color me skeptical.
That Didn’t Take Long: WeWork is cutting it’s revenue forecast and its CEO is asking employees to change it’s “spending culture.”
Over the Falls: London luxury home sales are plunging post-Brexit.
Class Act: Tim Duncan was the greatest basketball player of his generation – sorry Lakers fans but deep down you know its true and not all that close. True to Duncan’s persona, he left quietly, shunning the typically season-long distraction/going away party that players of his caliber so often demand in the modern era.
Fading Away: Why golf is going the way to the three martini business lunch.
Chart of the Day
The condo development capital stack is becoming a convoluted mess as banks pull back (h/t Tom Farrell).
Such a Bummer: McDonalds has stopped allowing customers to stream porn on their free in-store wifi. It will be interesting to watch how this impacts the bottom line as I’m pretty sure that the free porn was the only reason anyone still went to McDonalds.
Headline of the Year Contender: Woman Decapitated By Passing Train During Sex will be a difficult one to beat. In a twist that should surprise no-one, this happened in Russia and she was drunk at the time.
Inevitable: Someone shot a gun at a couple of teenagers playing Pokemon Go. Did it happen in Florida? Of course it did.
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