The past two years have witnessed a resurgence of the equity markets and a seeming stabilization of the real estate markets in the United States. At long last, the Fed began to taper its long-term program of bond purchases, signaling that the U.S. economy was ready to begin to stand on its own.
Yet, in early 2014, it is becoming evident that both Wall Street and real estate sectors experienced a small renaissance last spring.
One economist, in fact, has been consistently accurate regarding valuation in the real estate market. Robert Shiller’s theories—and their relevance to today’s markets—were recently validated by a small Swedish medallion. However, his work and its importance began a long time ago, in the 1970s.
For the better part of the last three decades, a debate brewed in the halls of economic academia. On the one side, economists propounded the efficient market hypothesis (EMH), based on the idea that markets tend to absorb all publicly available information and adjust prices accordingly. On the other, critics argued that in certain circumstances this theory simply did not work as promised. Nevertheless, EMH became a pillar of the American economic landscape. Taught in business schools, lauded in public and hailed as an example of how the “invisible hand” of the market is omniscient, EMH lent credibility to the rapidly evolving marketology that has become the official religion of Wall Street.
One of the primary critics of EMH, Robert Shiller, developed a theory that real estate was not—as traditionally believed—a good investment. Critiqued in the early 2000s at a time when the U.S. was going through the largest asset bubble in a century, his ideas, along with Karl Case, formed the basis of the Case-Shiller Index. However, in the wake of the global financial crisis of 2008, as property values plummeted around the globe, Shiller’s theories gained renewed interest.
As applied to real estate, the bottom line of Shiller’s theory is that over the long term, accounting for factors such as property taxes, interest, upkeep and inflation, real estate is not a good investment. While most people interpret his opinion as an indictment of homeownership, this notion is far from accurate. Shiller’s position partly decries the marketing of homeownership as a “virtue” and an investment vehicle.
Yet, even Shiller acknowledges the advantages of homeownership over and above renting under the US legal system. More importantly, he also notes that the concept of homeownership began in the early twentieth century as a means of encouraging families to save.
It is within this context that the real estate sector in the United States can normalize and begin to thrive again. We can begin this process by understanding that there are many reasons for an individual or a family to purchase a home. These may be financial, personal, psychological, familial or societal.
On a financial level, the real estate industry is well advised to distance itself from presenting the purchase of a primary residence as “the biggest investment of one’s life,” opting instead to adopt an approach where the house provides an incentive to save and build a nest egg.
The remaining reasons are, by-and-large, based upon the cultural and historical roots of our country. The United States was founded on the promise of the guarantee of life, liberty and the pursuit ofhappiness. This sentiment closely follows John Locke’s principle that it is a human right to purse life, liberty and estate.
To many of our founders, and to many Americans today, owning a home and happiness are intricately tied together. The concept has become part and parcel of our cultural DNA. In fact, the founding fathers debated the use of the word property, and the concept is enshrined in the Virginia Declaration of Rights, written by none other than George Mason.
So, in the 21st century, perhaps we can revisit our heritage, realizing that the acquisition of a home can be a far more personal and important decision to an individual than merely serving as an investment vehicle.
While the value of one’s home is an important barometer of the welfare of that individual and their family, the purchase of a primary residence should not be undertaken with an eye towards investment as its paramount purpose. It is only when we, as a country, end the comparison of real estate values and other investment vehicles, that the real estate sector of our economy can begin to heal.
Behzad Gohari is an attorney, entrepreneur and investor, and currently serves as managing director at The Althing Group, an advisory firm in Washington helping clients navigate the capital markets, especially in the realms of technology and real estate.
