I myself am not sure how we can benchmark a home value to compare across decades but hey this is done by a professor/economist so i am leaving to you guys to discuss and add comments.
Looks scary so much that i don't want to believe it
I have seen this graph for several years now. It is hardly new. Probably posted on 500 blogs and now here. Wait, it probably was posted here before.
The graph was made to convey emotions and meanwhile trying to appear scientific/ objective. It is not objective by any means. Prices being 'Adjusted for inflation' is one of the problems.
If they accurately adjusted the chart to include the consumer price index or "real inflation" you would pay well over 2 million dollars for a house that used to go for $100k in 1890.
Or to put it another way a house worth $150k today would only have cost you approx 6,500 dollars in 1890.
Which means the graph is clearly bullshit, just like the constant depreciating value of our money.
Shiller is in the business of selling shiller-case index. Paying attention to his data can be hazdarous to your wealth. RE has created more wealth than most other investments.
tlvx said:If they accurately adjusted the chart to include the consumer price index or "real inflation" you would pay well over 2 million dollars for a house that used to go for $100k in 1890.
Or to put it another way a house worth $150k today would only have cost you approx 6,500 dollars in 1890.
Which means the graph is clearly bullshit, just like the constant depreciating value of our money.
I assure you, houses did not cost $100K in 1890. You are either misinterpreting what the comment on the graph, or simply stirring things up.
The graph simply says, that if a house in 1890 cost {$100K in 2001 dollars}, then a similar house would {cost XYZ in 2001 dollars} in year PQRS.
Ford model T cost $450 in 1915, 7 years after it was first introduced. Translated to today's dollars, that around $10K, which makes sense, as some low end cars pretty much cost that much in US (and there are cars that cost 3-4 times less than that elsewhere).
Let's say a house now costs, and in the past used to cost, around 10-20x the price of a cheap car ONCE car production became mass. How much does that make a house cost in different years? Well, $450x 10-20 is $4500-$9000 for the actual price of a house in 1915. So that means that a house in 1890 probably cost $5k-10k.
Here is a link with discussions, opinions, personal accounts, and references for house prices.
HumDoHamaraDo said:Shiller is in the business of selling shiller-case index. Paying attention to his data can be hazdarous to your wealth. RE has created more wealth than most other investments.
The bolded statement is utter non-sense and can be hazardous to your wealth. I am not sure if you meant, "investing in one's own house has created more wealth blah blah", or "investing in real estate in general has created more wealth blah blah", but let me rebutt both:
1. The riches people in the world are: the Buffets, Gatesz, the Elisons, and the Helus. I can go down the list, but YOU would be hardpressed to find a significant percentage of moguls who were MADE by real estate.
There is NO value created by real estate. The only source of appreciation is that land is limited; that forces prices to rise, but not by as much as you think they do.
2. Other than as a nest for ones own family, a place to call a "home", and the forced saving vehicle it provides, a home is a piss poor investment when compared to other alternatives, perhaps even US treasuries. At least US treasuries do not require maintenance and do not fluctuate as much, and do not usually entail ignorant borrowers getting in shit to their neck and more.
3. The real estate moguls of the world are routinely (not once, not occasionally, but routinely) on the brink of bankruptcy. Real estate involves leverage (4:1, 5:1) AND mismatched cash flows. A real estate investor has assets (leases) which are short-termed, while liabilities (mortgages) which are long-termed. This, my friend, is the root of all evil.
4. It may appear that your parents, or your uncle+aunt, or whoever it is that has had their house for the past 25 years is making a bundle, but that is a function of two circumstances: (i) a forced vehicle, and (ii) significant leverage allowed for the purchase of a home.
If credit granting for house buying is conditioned on a higher downpayment, e.g., 35-50%, bringing the leverage to 3:1 or 2:1, then I assure you that the 1 or 1.5% above inflation rate of return that your uncle or parents are getting on their 25-year+ investment might all but disappear.
And the last bullet: transaction costs. What investment can deliver decent results when transaction costs include 6% real estate broker fees, 1% mortgage original fees, and in some places as much as 2% transfer fees? Don't forget those damn taxes. Have you heard of other (more appropriately termed as investment) assets that are taxed on the asset value, as opposed to the income value??? I have not heard of any other "asset" that is basically bleeding money in the form of taxes every f-ing month.
I do, however, agree with you that Shiller is selling his research. But gotta give him credit - he was saying since early 2000s that this is going to happen. HAD YOU come down from your high horse and actually respected what he has to say, or even given him a little benefit of the doubt, you TOO might have made something or not lost as much.
Here in NYC, where land is limited and people settle in outlying areas to get better value, the housing bust is finally being felt. Major job losses in the financial arena and the ripple effect are causing lots of pain. Parts of Queens and Brooklyn have already been impacted with foreclosures that are hurting those least able to recover.... But I believe Manhattan has some serious overbuilding to contend with and no easy solution in sight. So many new condos with so few buyers including the Europeans that used to have money. A friend of mine in a private financial firm (an LLC) was offered a bulk sale of new condos by the lender that were originally offered at $1,150/sq. ft. After negotiations, the bank was prepared to accept $450/sq. ft.!!! Even so after visiting the building, they turned it down. On the other hand, down in the Village, NYU is the monster that devours anything in it's way. They just announced their new 22 year master plan and, without any sense of modesty, say they'll need another 6,000,000 sq. ft. of space.... I think I know a buyer for those orphan condos when I see one.
va1234 said:I myself am not sure how we can benchmark a home value to compare across decades but hey this is done by a professor/economist so i am leaving to you guys to discuss and add comments.
Looks scary so much that i don't want to believe it
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HumDoHamaraDo said:Shiller is in the business of selling shiller-case index. Paying attention to his data can be hazdarous to your wealth. RE has created more wealth than most other investments.
I 2nd that. I have lost 0.25 Million in stocks and options and have made 70K+ in real estate, I am like Ph.D. in stocks and know not much in real estate.
HumDoHamaraDo said:RE has created more wealth than most other investments.
The Dutch bought Manhattan island from the Indian for $24 worth of trinket 384 years ago. If the Indian had invested that money in a modest account averaging 7% interest per year, that account would be worth $4,608,736,440,146 today. I am not sure what the unimproved land value of Manhattan island is today, but compounded investment isn't too bad.
johnrweb said:HumDoHamaraDo said:RE has created more wealth than most other investments.
The Dutch bought Manhattan island from the Indian for $24 worth of trinket 384 years ago. If the Indian had invested that money in a modest account averaging 7% interest per year, that account would be worth $4,608,736,440,146 today. I am not sure what the unimproved land value of Manhattan island is today, but compounded investment isn't too bad. No bank has survived 384 years, that money would have been long gone. Manhattan is still around.
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