This Week's Dire Prediction About Real Estate Prices
The financial newsletter Capuchinomics ("Investment Ideas Inspired by Monkeys," and not "Investment Ideas Inspired by Capuchin Monks") took the Brookings Institution,
The New York Times and a Federal Reserve board member to task this week for condoning a study suggesting single-family homes are still good investments. In a paper presented at Brookings, Pomona college professor Margaret Hwang Smith and her colleague (and husband) Gary Smith compare the cost of renting a single-family home to the cash generated by owning, a method they claim values real estate the way we value stocks. The Smiths portray real estate in Boston, Los Angeles and Dallas, markets other studies have red-flagged as risky, as undervalued. Only in San Mateo County, near San Francisco, did they find evidence of a bubble. "Most of the country is certainly not in a bubble if you define a bubble as prices far above fundamentals," said Gary Smith. "The average person in the U.S. is still better off buying than renting."
Capuchinomics editor Paul Mampilly calls the Smiths' paper the housing market's "Dow 36,000 moment," referring to James Glassman and Kevin Hassett's famously optimistic appraisal of stock prices in 1999, months before they collapsed. While some may take the Smiths' paper to mean that it's open season again for real-estate speculation (and will likely get burned), the key to their conclusions is long-term ownership. Even studies like the recent PMI Index report (pdf) that identifed Boston, L.A. and Dallas and 45 other markets as risky consider a single-family home in these places a good investment if held for five years or more. (Only in L.A. did some owners get burned after holding a house that long.) "And when you add in the intangible benefits--from the stake homeownership gives you in a stable community to the pure satisfaction you get from standing on a piece of earth and knowing it’s yours—it’s hard to beat." In other words, it's still your father's real-estate market. The full text of the Smith's paper in .pdf is here.
The New York Times and a Federal Reserve board member to task this week for condoning a study suggesting single-family homes are still good investments. In a paper presented at Brookings, Pomona college professor Margaret Hwang Smith and her colleague (and husband) Gary Smith compare the cost of renting a single-family home to the cash generated by owning, a method they claim values real estate the way we value stocks. The Smiths portray real estate in Boston, Los Angeles and Dallas, markets other studies have red-flagged as risky, as undervalued. Only in San Mateo County, near San Francisco, did they find evidence of a bubble. "Most of the country is certainly not in a bubble if you define a bubble as prices far above fundamentals," said Gary Smith. "The average person in the U.S. is still better off buying than renting."
Capuchinomics editor Paul Mampilly calls the Smiths' paper the housing market's "Dow 36,000 moment," referring to James Glassman and Kevin Hassett's famously optimistic appraisal of stock prices in 1999, months before they collapsed. While some may take the Smiths' paper to mean that it's open season again for real-estate speculation (and will likely get burned), the key to their conclusions is long-term ownership. Even studies like the recent PMI Index report (pdf) that identifed Boston, L.A. and Dallas and 45 other markets as risky consider a single-family home in these places a good investment if held for five years or more. (Only in L.A. did some owners get burned after holding a house that long.) "And when you add in the intangible benefits--from the stake homeownership gives you in a stable community to the pure satisfaction you get from standing on a piece of earth and knowing it’s yours—it’s hard to beat." In other words, it's still your father's real-estate market. The full text of the Smith's paper in .pdf is here.
posted by burb at 11:06 AM
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