I read Yale economist Robert Shiller’s Irrational Exuberence back in 2006. He wrote it in 2000 and espoused this wacko idea of home prices falling significantly. Shiller is one of the co-founders of the Case-Shiller index that tracks home prices. His theories on the housing market have come in and out of favor in the last few years, depending on the current views of the media.
I’ve been accused of being a perma-bear, but I’ve thought the single family housing market would correct itself in time, if the government would allow it to. Shiller, however, in an interview this past week said that might not happen. He said, in part:
[T]he shift toward renting and city living could mean “that we will never in our lifetime see a rebound in these prices in the suburbs.
Why such pessimism? He explains:
We don’t have to have an upturn in the market. You know, I take home prices back to 1890. They go through decades of stagnation. It’s not like it’s always booming. It hasn’t been that way, and there’s no reason why it should boom.
Economists used to think that home prices fall in general. Here’s the argument: We get better and better at making houses. Technological progress [means] prices go down. That could still be true– let’s not forget it. They are going to build better houses now. People won’t want the old ones.
In general, new homes do command higher prices than the old ones. There are a couple of reasons for this. One is that most buyers prefer a blank canvas– they don’t want to have to go through the time and expense to undo or redo highly personalized or outdated decor. They like knowing that everything is new and under warranty.
The other reason newer homes command higher prices is that people’s taste and lifestyles change over time. I think it’s always funny when buyers say the want an older home with character and charm– then they complain about the small closets and lack of bathrooms.
Here’s the rest of the interview with Shiller. You might find it interesting: