Yesterday’s S&P Case Shiller May report showed home prices across 20 major U.S. metro areas were up 0.6% since April, the second straight monthly gain after seven straight months of decline. But prices are down 4.5% since last May, and prices are down 32.3% from June/July 2006 to May 2011.
Case Shiller Index co-creator and Yale economist Robert Shiller told Bloomberg yesterday that “owning some big house is not necessarily so smart” and mortgage rates “are priced off the 10yr Treasury.” The first statement requires some context and the second statement is just plain wrong. Here’s my view on each, and also the full video.
Housing has been central to American dreams and political machinery for decades. And when it comes to someone’s primary residence, it’s easy to mix up investment strategy with personal preference.
When an investor is looking to buy a stock, they’re looking at how much the company can earn and determining if the price is worth paying for those earnings. When a homebuyer is looking to buy a primary residence, that math often takes a back seat because they usually don’t think of the property as earning income. They mostly think of whether the kitchens/bathrooms are upgraded, can it fit their growing family, and can they afford the down payment and monthly obligations.
What Shiller was getting at was two things: (1) Why can’t the American Dream mean investing in non-housing assets?, and (2) Home prices may see more strain as everyday people choose to rent while waiting for economic improvement. Here’s his full statement:
“People are rethinking the American Dream. You know, we’re smart. That’s what we pride ourselves as Americans, right? Owning some big house is not necessarily so smart. How about having a portfolio of stocks, bonds, commodities that’s better diversified, and rent? And then you’re more flexible. And hey, you’re very American. I don’t see why the American Dream has to be a house. So maybe we are going through a change like that. And that might suggest a longer period of retrenchment for the market.”
The problem with Shiller’s vision for a revised American Dream is that everyday people don’t understand how to invest in non-housing assets. They understand kitchens, bathrooms, kid’s rooms, and monthly payments. That’s why housing is so ingrained in our social and political belief systems.
I should be clear about my position: as a mortgage banker advising people on whether they should buy homes, I obviously believe in housing. But I turn down plenty of deals that I don’t like mathematically.
Also Shiller’s positions are very macro. His Case Shiller Index tracks major metro areas, and real estate pricing is hyper-local. You can’t determine whether a home investment on your favorite street will perform by looking at Case Shiller or any other national price data.
Case in point: the city of San Francisco contains only 12% of the house inventory in the “San Francisco” component of Case Shiller data. The remaining 88% is the rest of the five-county Bay Area region Case Shiller uses.
Don’t think you’re not necessarily smart if you’re looking to buy a home. Just be smart about it: it is an investment and must be treated as such. So find smart real estate and mortgage advisors who focus (respectively) on local market data and investment math rather than just on property characteristics and monthly payments.
As for Shiller’s statement on mortgage rates being tied to the 10-year Treasury Notes, that’s ‘not necessarily smart’ to say the least. Mortgage rates are tied to daily trading in mortgage backed securities (MBS), not 10yr Notes.
Surprising that a housing expert of his magnitude would be so wrong.
Proves that there are all kinds of real estate and investment advice out there. No wonder people don’t know who to trust.