The reports of my death are greatly exaggerated
Just like Mark Twain, I think that real-estate has been prematurely ‘written off’. Do you need proof?
Just check this often-cited graph (I think that it’s from Irrational Exuberance by Robert Shiller) floating around the internet:
It purports to cover a period from 1900 to 2005 in a linear fashion … a clear bubble-spike, right?
What could one reasonably conclude from this?
A long downward trend and/or an even longer flattening until house prices catch up with, say, 3% – 4% inflation?
Now, take the period covered by the red line beginning roughly in line with where the ’10’ starts in the phrase on the graph that says “Yields on 10-Year …” – got it?
That’s roughly 1987 until today …
Now, let’s look at an a national index of housing prices covering that same period from a source that I trust – Standard & Poors (the same rating agency that produces the S&P500 stock price index):
This picture tells a slightly different story, doesn’t it?
One reason is that this one, I don’t think, is inflation-adjusted whereas I believe the Schiller one is (or at least ‘adjusted’ for something … any of our readers know what that might be?). In either case, a definite ‘bubble’ can be clearly seen in both charts from, say, 1999 to 2007.
But, have a look what happens when you break this second chart into three sections:
1. We see the tail end of a rise from (we don’t know when, because S&P apparently only started collating this data in 1987) to the end on 1989 … the extent of this rise is pretty important, because we then see …
2. … a ‘flat’ line (or worse) from the end of 1989 to roughly the end of 1998, then …
3. … all hell breaks loose from the beginning of 1999 to somewhere towards the end of 2006 when a clear crash occurs.
So, was the flattening in 2. a correction for 1. OR was the growth in 3. an over-correction of 2.?
I can’t say for sure, but I can say this:
If you draw a compound growth curve between two points: a 20 year period when the market moved from an index of 75 (roughly at the end on 1987) to an index value of 200 (roughly at the end of 2007), we can see that that represents an average compound growth rate of just on 5%
Given that real-estate compounds at 3% to 6.5% annually, depending upon which source you believe (I’m firmly in the 6%+ camp), here’s what all of us as investors have to decide …
Buy now (or soon) while the going is cheap (particularly, if you think that interest rates will also start to go up soon), or wait because you believe that real-estate is still overpriced.
Be warned: if you wait too long (is that 6 months or 6 years?), the ‘real estate discount party’ might be over!