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Bloomberg / Bloomberg via Getty Images
Bloomberg / Bloomberg via Getty Images
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The most recent figures from the S & P / Case-Shiller index have fallen today, allowing us to take a look at the direction of domestic values. The index follows the prices of the national houses. It's an important indicator, but it's really only the financiers who talk about it, which is odd because Americans hold about $ 26 trillion of their wealth at home. That's about a quarter of their total net worth. The Dow Jones Industrial Average, which tracks stock prices, is attracting a lot of attention – but for many families, their homes are the most valuable.
The history of the index is quite fascinating. For a long time, we have mostly ignored the evolution of housing prices over time. All this has changed thanks to Robert Shiller, a Nobel Prize-winning behavioral economist, who co-created this index with his colleague Karl "Chip" Case (as his name indicates).
So Shiller knows the housing market and has long wondered if buying a home is really a safe investment. Its index shows that housing prices have not increased much in the long run. Do you need to use your life savings to buy a home? This is debatable.
Another way to track house prices
The investigations of Shiller and Case began in the 1980s, when they got their hands on "Univac tapes" – essentially the aging version of a USB key – containing data from real estate appraisers on home sales. With these tapes, they built the beta version of their index and they published some articles about it.
"We did not even submit them to prestige magazines because we thought it was not an interesting topic," says Shiller. It's cooler now though; their index is the gold standard for pricing domestic houses. And it can be a powerful tool for spotting real estate bubbles, as Case and Shiller prove in the early 2000s.
The long-term growth of house prices is pitiful
In his classic book Irrational exuberanceShiller looked at home price history dating back to 1890. He found that they had gone up and down, but in the long run, they actually increased very little. Between 1890 and 2019, national housing prices rose by less than 0.6% per year (after taking into account inflation). It's pitiful! To put this number in perspective, the average real return of the S & P 500, the stock index of the 500 largest US companies, is about 7%.
Shiller is not the only one to have found that house prices have not increased much in the long run. Mainly because we built more. That being said, it appears that in advanced countries, house prices have tended to increase since the Second World War, which could be explained by the fact that development has slowed down.
So, should I rent?
While the Case-Shiller index tracks home prices nationwide, it does not track rents. Paperscar Jordà and other economists recently published a discussion paper on the prices of the main forms of wealth in 16 countries from 1870 to 2015, according to which, when you integrate the value of rent, houses seem to be a much better investment. Houses have a return similar to that of equities and the housing market is also less volatile. In the United States, the authors estimate that the total net return of a typical home, including rent, is about 6% per annum in real terms, one percent less than the average stock market return.
The Case-Shiller Index also does not measure other important factors, such as the pleasure of having one's smallhold, being rooted in a neighborhood, building a community, or being liberated. a terrible owner. Houses also enjoy tax benefits and require you to save, which can be helpful for many of us who need motivation.
That said, home ownership has headaches. It's more difficult to move. You must pay to repair items and pay property taxes. And if your city's economy crumbles – as it did in Detroit, Shiller's hometown – the value of your home weakens.
Many people make the mistake of believing that home ownership is a unique opportunity to create wealth. According to them, renting is "the idea of putting money in the trash," says Shiller. "I do not think it's the right way to think about renting a house." If you rent instead of buying, you can use your initial down payment to invest in potentially more profitable investments. The quality of this financial strategy depends on many factors, including the length of your stay in a region.
Are we in another real estate bubble?
Shiller warned the world against two big bubbles that have devastated our economy over the past 20 years: the stock market crash of the late 1990s and the housing crisis of 2007-2009. This – and the fact that he is a Nobel Prize-winning economist at Yale – means that when he speaks, people listen.
A few months ago, Shiller again warned the world against a possible real estate bubble. As the chart shows, since 2012 we have witnessed the third largest real estate boom in American history.
Do not see the graph above? Click here.
"I think we should be worried," says Shiller. "House prices have been rising since 2012, with good performance." He says it might take a while, but the boom like this ends. "With the real estate market showing signs of slowing down, the turning point could already be for us."
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