Yes we are assuming that the past informs the present. However I
want you to look at this chart that I have posted from the second
item. Fundamentally the new generation has adopted the condo
lifestyle close to their work. The trend is moving against the
single family dwelling model for efficiency sake.
Thus Shiller is right that optimism may well be misplaced and we
could be seeing a new life way taking shape that backs of from the
massive commitment that a single family home demands.
Cities are also waking up to the Vancouver model in which modern
condos are all stuffed downtown to completely revitalize the region.
Add in rapid transit to satellite hubs and the car is off the road.
In Vancouver the traffic entering the core has stagnated for years
because of this while the population of the core has surely doubled.
SHILLER: All This
Housing Optimism Is Way Too Premature
Henry
Blodget and Lucas Kawa | Jan. 25, 2013, 4:36 AM
Yale
professor Robert Shiller is one of the pre-eminent experts in house
prices.
Shiller
created the "Case-Shiller Index," which tracks changes in
house prices on a monthly basis and is the most closely followed
house-price index in the country.
We
sat down with Professor Shiller in Davos to get his take on the
future of the housing market.
Henry
Blodget:
Everybody in the U.S. seems convinced that the housing market is
going to come roaring back, it’s going to save the economy, house
prices are going to rise, houses are a great investment again. Are
they right?
Professor
Shiller:
First of all, I challenge your statement a little bit. The
Pulsenomics survey of experts – they had 105 experts in their
December survey – and not one of them predicted a return to the
boom that we had. The most optimistic had a real return for the next
4/5 years of something like 6 percent.
Blodget:
But that’s way better than zero.
Shiller:
I’m taking the most optimistic out of 105. We also had – what’s
that perma-bear guy, anyway, we had someone at minus 10 percent. I
think that we may be recovering, but I also think that we may have
further real price declines in the coming years. People are
overly – we tend to focus on the latest starts and permits and
other indicators, but I think that there might have – and this
isn’t a confident forecast – but there might have been a decline
in our appreciation of this American Dream: detached, dispersed
single family homes – you
have to drive for 45 minutes to get there from your job. And the idea
has gone, well it’s not gone, but it’s diminished – that this
would be a good investment.
So the latest data, ever since the crisis, almost all new housing has
been rental. New
household units want rentals. If
that’s a trend, it means that home prices of single-family detached
homes should probably go down, because it’s hard to maintain those
as rental units. If people demand that kind of – I think they’ll
sell at a discount. Co-ops and condos could have a different trend at
the same time.
Blodget:
So what is your sense of the next five years? Do you think we’ve
hit bottom in the housing market or do you have to stratify it that
way?
Shiller:
I think that we might have [hit bottom], but my biggest sense is that
probably nothing dramatic happens either way. If the Pulsenomics
survey is right, and it’s up between 1 and 2 percent real, that’s
plausible to me. But also down 1 or 2 percent real, that’s
plausible. I’m sorry I don’t have a more precise forecast.
The
Case-Shiller Index.
Blodget:
One of the things I feel that people might be missing is that if the
economy does return to strength, at some point presumably interest
rates will start to rise to more normal levels which will change the
cost of mortgages and make them much more expensive. How much do you
think the cost of mortgages affects the price of housing, and if
interest rates do go from 4 now up to 7 percent, will that dampen
house prices?
Shiller:
It would seem from economic theory that it ought to. If the 10-year
Treasury goes from 1.8 percent to 7 percent, that means mortgage
rates will go from 3.5 to 10 percent, or something like that. And
that ought to affect home prices. And in a very broad sense, that
seems to be the case. Home prices reached a low in the early 80s,
right around the time Paul Volcker pushed interest rates up. But on
the other hand, it doesn’t fit very well, this whole model. Home
prices don’t look like an inverse of interest rates.
Blodget:
They don’t? You’ve studied it hundreds of years of home prices
and you haven’t seen a correlation between the two?
Shiller:
No, in fact if you look at the path of interest rates since Paul
Volcker, interest rates have just gone down secularly for 30 years.
It’s absolutely amazing, how strong that downtrend is. And it’s
hit practically zero, it’s at a record low right now. It can’t
keep going down, so now where is it going to go from here? I don’t
know. I don’t see as much commentary on this trend. Somehow, there
was a turning point, a major turning point with Paul Volcker, that we
went from an economy of increasing inflation to decreasing deflation,
and not many people appreciated how profound that transition was. But
now, the question is where are we going now when we’ve hit record
lows. I wish I knew.
Blodget:
Well, presumably there are two options. Either we’re Japan and
rates stay low for 20 years, or they go back up.
Shiller:
The question is attaching probabilities to those scenarios.
Blodget:
Do you want to take a stab at that?
Shiller:
I don’t know. This is something that, Bayesian statisticians have
tried to represent ignorance by probabilities, and this is why my son
is a philosophy Ph. D candidate right now, and he’s interested in
how to represent uninformative priors. There’s all kinds of
paradoxes when you try to do it. So we just don’t know, and I can’t
attach a probability.
Blodget: Thanks,
Professor Shiller.
This item comes from an investment
newsletter and the chart tells it all.
Breaking: We Hit the Peak in
2005!
By Jeff Siegel | Monday, January 28th, 2013
This was my mother's daily commute for about
two years after we moved out to the suburbs in 1981. Total transit
time was about three hours round-trip, depending on traffic, of
course.
So basically, my mother spent about two and
half days' worth of time every month driving to and from work...
Fortunately, she only had to do that commute
for a couple of years before getting reassigned back to the main
office, which was much, much closer to home. But it was around that
time I realized I would never put myself through that kind of hassle.
It just made no sense... the wear and tear
on the car... the stinging fuel costs... the wasted time and
productivity... the stress of daily traffic...
No, this was never something I wanted. And
after college, I made a conscientious effort to never live more than
ten or fifteen minutes from work. Anything more would just be
unacceptable.
And as it turns out, I wasn't alone. Over
the past ten or fifteen years, there's been an interesting shift in
behaviors regarding daily work commutes. And what was once considered
just a part of a daily routine has started to become an exercise in
futility.
The mere thought of spending a significant
amount of one's life behind the wheel of car, sitting in traffic and
starting the day completely stressed out has sparked a migration back
to some of this nation's cities — at least, for a younger
generation that works within city limits.
And this
has led to some folks not even needing a
car anymore, as biking, mass transit, and carsharing services like
Zipcar are making it easier for daily commuters to live without a
car.
This new trend not only represents a
complete reversal of the car-centric society in which I grew up, but
some believe it could actually be one of the reasons behind what some
are now calling “Peak Car.”
There was an interesting article a couple of
weeks ago by business and policy writer Tim Fernholz in which he
considers the possibility that demand for cars has hit a plateau and,
from this point forward, demand can only start to decline.
It's an interesting thought. But on the
surface, it's a hard one to buy.
That being
said, there has been
a visible trend in vehicle miles traveled that could lend itself to
Fernholz's argument. According to the OECD, growth in total vehicle
miles traveled in the developed world has actually been decreasing
steadily since the early part of this century...
In his piece, Fernholz attempts to justify
this data with a few solid explanations that are at least worthy of
consideration:
Of course, current trends that can make a
supportive argument for the case of "Peak Car" do not
reflect the full global scenario...
Many automakers today are looking towards
emerging markets for continued growth, and certainly we've seen
evidence of this in China, India, and a few South American countries.
The question, however, is will these
emerging economies embrace car-centric communities as we have done in
the United States?
Car ownership in emerging economies is
definitely viewed as a status symbol. And having this certain taste
of freedom that we've grown so accustomed to in the U.S. is still
very new in other parts of the world, and offers a tremendous amount
of enthusiasm over car ownership.
Then again, with the significant
availability of cars comes some of the hassles, too — particularly
when it comes to fuel costs and traffic. Consider for a moment the
world's longest traffic jam in history was in China in 2010: It
stretched for 62 miles and lasted twelve days!
Truth is it's still too early to know
exactly how car ownership will play out over the long-term in
emerging economies. But here at home, we're already witnessing a
transition to alternative forms of transportation and mass transit
acceptance.
I can't say with absolute certainty that
this could prove a "Peak Car" theory, but here's what we do
know: There has been clear evidence of robust growth in mass transit
ridership over the past 16 years.
According
to the American Public Transportation Association, from 1995 through
2011, public transportation ridership increased by 34%, representing
a growth rate higher than the 17% increase in U.S. population, and
higher than the 22% growth in the use of the nation's highways over
the same period.
Also worth noting, in 2011 Americans took
10.4 billion trips on public transportation — the second
highest annual ridership number since 1957.
And as far as alternative forms of
transportation, we know from the actions of automakers that the
transition to more fuel-efficient vehicles, like hybrids and
electrics, will continue; natural gas will eventually end up powering
nearly all of our buses and trucks; and freight rail will continue to
build market share, especially in the race to develop and secure this
nation's oil and gas resources.
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