Robert Shiller…Wrong About Real Estate

Whether it’s Joseph Stiglitz, Paul Krugman, Daniel Kahneman, or Obama (the Nobel committee took a huge dent in credibility after that), even Nobel laureates are not beyond reproach. Now it’s Robert Shiller, another liberal Noble Prize recipient who has been wrong about wealth inequality and other matters, writing in the New York Times: Why Land and Homes Actually Tend to Be Disappointing Investments.

As to be expected, this is a vague article with sparse evidence and is easily refuted.

Here is the crux of Shiller’s argument, to save you the effort of having to read through hundreds of words of filler, ‘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.’

Hmmm…let’s see….Bay Area real estate has doubled since 2011, and has outpaced the S&P 500, even going back 30 years. So I guess all those people should feel like fools.

Although prices fell briefly in 2006-08 before rocketing higher in 2011-2015, there are many factors that bode well for Silicon Valley real estate: scarcity, huge demand by rich foreigners, private equity, and millionaire techies, and floods of capital – both cognitive and financial – into the region.

As they say, ‘location location location’ , which Shiller ignores, in favor of the quote that fits his thesis, ‘they can’t make more land’. A lot of people buy land or property in the hope of renting it and or developing it, neither of which are accounted for by Shiller’s index. It’s not like buyers are just throwing darts at a map.

Shiller (what an appropriate name because he shills for the left) also ignores the role of leverage. If someone buyers a home worth $100k, putting $30k down, and the price rises by 10%, he makes $10k or about 33% off his initial $30K – a very good return. I’m ignoring the interest on the mortgage for this example, but leverage is how people get rich (and sometimes ruined) with real estate. Also, there are more options for homeowners who use leverage vs. stock traders who use leverage and are at the mercy of the awful brokers. For mortgages, payments can be deferred.

How about renting? Home ownership is about creating wealth for yourself instead of making the landlord rich. There are many millennials who are living with their parents instead of pissing away money every month for rent, and then using the saved money from their job to buy a home, achieving financial independence. With renting, you’re never are able to achieve independence, since you’re constantly draining money, and the rate of rent, especially since 2011, for most locations has far, far exceeded inflation. Over the long run (>5 years), the data suggests buying is better than renting

So tired of the generalizations and lazy thinking that passes for journalism these days, and even NYT writers and Nobel Prize laureates are not immune.

Some on the left argue that home prices are too high and that there is a conspiracy to keep prices too high, ignoring the role of supply and demand and other contravening evidence, just like how the left wants to believe police are systematically targeting blacks, that wealth inequality is bad for the economy, or that institutional racism is to blame for certain groups falling behind.

Some favor a ‘land value tax‘ (LVT), because real estate speculation encourages rent seeking activities rather than other, more productive investments. The tax, in theory, reduces the speculative element in land pricing, thereby leaving more money for productive capital investment:

The owner of a vacant lot in a thriving city must still pay a tax and would rationally perceive the property as a financial liability, encouraging him/her to put the land to use in order to cover the tax. LVT removes financial incentives to hold unused land solely for price appreciation, making more land available for productive uses. Land value tax creates an incentive to convert these sites to more intensive private uses or into public purposes.

There are several problems with the LVT:

Proponents of LVT argue that there are better investments than real estate, because real estate is an ‘unproductive’ use of capital. If entrepreneurship is so productive, why is the failure rate so high? Entrepreneurship has a 90-95% chance of failure…Bay Area homes have doubled since 2011…the choice seems obvious to me. It’s rational to not gamble on entrepreneurship.

Renting and building is often fraught with difficulties and expenses such as building and ordinance codes, dealing with potential disability and discrimination lawsuits, damage to property by renters, insurance, cost of upkeep and repair, and processing evictions. If landlords, already burdened by costs and regulation, cannot collect on the underling appreciation of the land, there may be no incentive to offer housing. Also, businesses often lease real estate. A LVT would probably cause a major supply shortages and distribution as landlords close shop and renters, both tenets and businesses, are forced to pay higher prices or have nowhere to go. This hurts the very people that the left wants to helps.

Also, where is the incentive to invest in urban development if there is no return. If private equity wants to buy a bunch of blighted homes in a bad neighborhood and improve them, why should these investors not profit from the appreciation in land value?

It’s theft, not much different than the Soviet Decree issued between 1917 and 1924 as a consequence of the October Revolution, as private property (businesses, bank accounts, land) was sized and nationalized. Homes owners would lose significant equity from a LVT.

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