On Brett Arends on House Prices

I know I shouldn’t be doing this.  I talked about home prices yesterday, and I’ve singled out the Wall Street Journal’s Brett Arends way too many times already.  (This will be his sixth mention in this blog. See also one, two, three, four, and five.)Mcmansion_under_construction W. Marsh I don’t want to give the impression he is exceptionally bad. He’s merely typically bad, but writes often and on topics I like to talk about.

But Arends ran this column yesterday sharing his thoughts on house prices and, well, fish gotta swim and birds gotta fly.

He starts out by mentioning the previous day’s release of the Case-Shiller home price indexes for March.  This update, which was, let’s face it, more or less as expected, was “startling” to Arends because of  “What the latest data show about the long-term of the real estate market.”

Apparently, this last set of numbers was the missing piece needed to allow Arends to make the observation that since the late 1980s and early 1990s, house prices have only beaten inflation by one or two percentage points a year.

Well, golly.

As it turns out, house prices have roughly tracked inflation over very long periods, at least since the 1890s, never mind the 1990s. I made a nice chart of this in a post a few months ago. I got the data (and the entire idea) from the work of an obscure economist named Robert Shiller, known in certain circles for co-inventing a useful index of home prices.  This little-known professor detailed the longer history of home prices in the second edition (2005) of his bestseller Irrational Exuberance, a book widely purchased, if not widely read.

Arends draws from this insight that house prices hug the inflation rate to conclude that “You can often do better on long-term inflation protected government bonds.”  And then, as if somebody reading over his shoulder pointed out that owning a house has certain other benefits besides price appreciation, he launched into a defense of ignoring the fact that you can live in a house but not in a bond.

Conventional wisdom long held that home ownership was a route to wealth, and the imputed rent — in other words, the right to live in your home — was just part of the value you got from it. Under that widespread view, the recent housing bust was simply a temporary, though deep, pothole.

I would be the first person to confirm that conventional wisdom did indeed once hold that home ownership was a route to wealth.  With the smallest provocation, I can be induced to supply citations showing various mainstream gurus telling their followers to invest in a house.  But I am not so convinced that this was a view widely held for all that long. Circumstantial evidence suggests it really kicked in around the mid-1990s, when the recent bubble began.  (And, possibly not coincidentally, when the tax laws were changed to favor capital gains on houses.)

But big picture, I would hope it is quite obvious that ultimately the only economic benefit of a house is that it can be lived in. It is a stark illustration of just how crazy things got during the bubble that so many people, apparently including a columnist at the Wall Street Journal, lost sight of that fact.

[Photo: W. Marsh]

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