Re: Shiller - "We now have a Real Estate Bubble"..
Ironically, in the May 2005 Kiplinger's magazine, James Glassman tackles the same topic. However Glassman's conclusion is the opposite of Shillers. To determine who's right, we could always compare who's book was better -Shiller wins that hands down over Glassman's
Dow 36,000.
Both quote statistics to make their point, although we all know that one can bend statistics in ways to prove one's point. For example, I'll first quote from the Money article:
for the United States as a whole, real home prices were 66 percent higher in 2004 than in 1890, according to the index my research assistants and I have put together. But all of that increase occurred in two brief periods: the time right after World War II and since 1998.
Other than those two periods, real home prices overall have been mostly flat or declining. Moreover, the overall increase, including the booms, is not very impressive -- 0.4 percent a year.
Now here are Glassman's numbers describing the rise in home prices:
...though existing-home prices rose faster in 2004 than in any year in a quarter-century, they were up just 8.3%, according to the National Association of Realtors. Since 1950, residential real estate prices have increased an average of 5%, says Freddie Mac. That's only a little more than 1% per year after inflation.
Shiller removed the periods after WWII and 1998 to present and gets 0.4 %/year. Glassman keeps those periods in and gets 5%. Statistics can be fun.
To make his point, Glassman quotes his buddy and co-author of
Dow 36,000, Kevin Hassett from
Bubbleology: The New Science of Stock Market Winners and Losers. But just briefly.
Shiller also alluded to home prices going beyond the limits of affordability. But Hassett's article uses the housing-affordability index calculated at economy.com. which Marc Louargand of Babson Capital wrote in a letter to clients. It's described as follows:
If the median family income in a market is exactly the amount needed to qualify for a loan to buy a house at the median resale price, then the index is 100. If the median income is more than sufficient then the index rises above 100. Louargand found that of the 318 metropolitan areas tracked, only 29 had affordability indexes less than 100. "In fact," he writes, "the average index value as of year-end 2004 was 180, which indicates that the median family income can qualify for nearly twice the median home value."
But just because you qualify for a loan amount, certainly doesn't mean a family can actually afford it in the real world. I was always told never to take a mortgage for what you qualify for, as you're likely to over extent yourself.
Glassman quotes Value Line's William Ferguson relating to a demand issue that may not have been seen before.
On the demand side, purchases of second homes are rising as baby-boomers get close to retirement...
He also mentions immigrants as contributing to home-buyers, but that has certainly happened before. Both articles we very interesting, and equally make valid points.
Bookm
