Robert Shiller: Don’t Invest in Housing

Robert Shiller of Yale was on Bloomberg yesterday discussing housing and his general outlook. But the most interesting comments were with regards to his general view of housing as it pertains to your overall portfolio. Shiller said that investing in housing was a “fad” and not a great historical investment. Of course, if you’re familiar with his long-term real returns chart  (see the chart in #9 here) housing generally generates returns that are in-line with inflation. US residential real estate just isn’t a great investment in real terms. Shiller explains why:

“Housing is traditionally is not viewed as a great investment. It takes maintenance, it depreciates, it goes out of style. All of those are problems. And there’s technical progress in housing. So, the new ones are better….So, why was it considered an investment? That was a fad. That was an idea that took hold in the early 2000’s. And I don’t expect it to come back. Not with the same force. So people might just decide, ‘yeah, I’ll diversify my portfolio. I’ll live in a rental.’ That is a very sensible thing for many people to do.

…From 1890 to 1990 the appreciation in US housing was just about zero.  That amazes people, but it shouldn’t be so amazing because the cost of construction and labor has been going down.

…They’re not really an investment vehicle unless you want it for your personal reasons.”

This is a contentious debate.  In strict economic terms housing is viewed as investment and not consumption.  That’s why the BLS doesn’t include house prices in the CPI.  Even though housing includes fixed investment, you’re really consuming your house over the course of many years so there’s elements of both consumption and investment in housing.  The reasoning Dr. Shiller uses here is a big part of the consumption.  A house is a depreciating asset even though the land might not be.

Obviously, there are a lot of moving parts here and I am not sure I completely agree with Dr. Shiller.  Well run rental properties and commercial properties can be good investments, but most of us are living in our homes.  We’re consuming our home one day at a time and hoping that the scarcity of housing and land will result in prices outperforming inflation.  But there’s a flaw in that thinking also.  Because housing is such a large portion of most people’s expenses it has a very close connection with wages which have a very close connection with inflation.  So it’s not surprising to see house prices revert to the mean when they diverge from the annual rate of inflation – in general, that’s a sign that prices aren’t supported by incomes.

Personally, I prefer to think of a house as a place that provides intangible benefits and not investment benefits.  You buy a house because it puts a roof over your head.  You buy a house to live in it, not to invest in it.  But, like commodities, housing has become its own “asset class” that Wall Street has packaged up and sold to the American public as an equivalent to buying 500 of the best companies in the world (the S&P 500).   Most people also don’t invest in the stock market, but that’s a different discussion….I wouldn’t go so far as to say that real estate can’t be a good investment for some people (mostly experts), but for most of us the odds are that “investing” in real estate is not the right way to think about things.

I’d love to hear reader thoughts on this topic….



Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • LVG

    Most people have mortgage, tax and maintenance costs associated with a house. The odds of overcoming those costs with appreciation are extremely low, but that doesn’t stop people from betting on it.

    It’s the hot thing to speculate it on these days. And the government and Wall Street seem complicit in pushing this idea that you should invest in real estate. Of course, that’s great for growth in the near-term and it wrecks the economy in the long-run. Oh well. Fool me once….

  • Frederick

    Mortgage is latin for “death contract” for a reason. You’re not the one winning when you take out a home loan.

  • Warren Buffett

    Tier 1 investments are the ones where you can re-invest your earnings / dividends back to the asset to get growth. So, owning a business (either privately or through stocks) is the best investment you can make.

    *Rental* Real Estate belongs here because just like a company you actually have a inflation protected net profit. And you can buy more properties from profits and grow your assets.

    Theme: Grow assets by reinvesting dividends.

    Tier 2 investments are debt. You can re-invest dividends / coupons, but you don’t get the same rate of return.

    Tier 3 is Owning a home for living. There is implied income, but you really can’t re-invest the dividends. It is also a good proxy for long inflation and long demographics growth. (But, only in dense populated areas / metros)

    Tier 4 is your commodities (and gold). But, this should only be used as a timeless insurance (2% of your portfolio). i.e you only have to buy once and not renew it every year (like options or other paper insurance)

  • WoM

    Good article, until the part about 500 best companies in world = S&P 500

  • anonymous

    There’s two other reasons people buy a house – control and predictability.

    If you don’t live in a place that has rent control laws, then you smooth out the variation in rents by buying and having a fixed rate mortgage (yes the maintenance, tax, insurance will vary, but all those are quite secondary to the mortgage).

    Secondly, there is, for many people, a big intangible value that you’ve forgotten: it’s about having control about the place one lives, including whether to have pets, remodeling to suit one’s needs/desires, etc.

  • Bee-lakke

    Housing costs should be thought of as living expenses, just like food, transportation, clothing etc. It is not a good thing when those go up more than wages, because that just decreases living standards. Would we be happy if car prices consistently increased more than wages (and used car prices increased too)? No, of course not, because that would reduce our disposable income. But that is what rising house prices do to non-property owners. The house price boom of the last decade was effectively a tax on the young that benefitted older homeowners. And even those older homeowners lose this benefit if they have kids, and need to help those kids with their housing expenses. Government policy should certainly not be encouraging rising housing prices, but unfortunately govt sees this as an easy way to generate a false “wealth effect”, and keep the party going.

  • JKH

    Rental housing is an investment with some modest net operating yield after operating expenses, and long term capital gains potential – mostly base on land value. Owner occupied housing is an investment with a similarly low imputed yield but with the same long term capital gains potential. Either way, it’s like a low yielding long duration stock with capital gains potential. And there is huge cyclical volatility in the capital gains pattern.

    Shiller’s point is that these are all nominal quantities which when deflated amount to little if any long run real return. But given the massive macro scope of the defined asset class and the very long duration of his study, this shouldn’t be all that surprising.

  • Stephen

    His comment really needs to be put into the context of a portfolio of capital worth. For most people housingshould not be an investment ,because it would be overweight in their portfolio of cap value. For others with higher net worth it has a place as an investment over and above whatever property they live in. This is because it is a long term hedge against rising labour costs to a better degree than say cash,but not so good as equities. It does have a much longer cycle than equities and as such it offers some diversification benefit to equities and smoothes some of that volatility.The latter is not to be ignored later in life if equities for the purpose of buying an annuity happen to be in a bear market,but housing is not. For example around 2002/3 if you had been buying an annuity would you have preferred to be dependent upon equities ,or housing to fund that?
    I did not read Shillers comments so perhaps he implied some similar points for all I know. For sure he was partially right in identifying post millenium as a time when many people did use housing as an investment and many of those people were really not in a position to do so in so far as I say it led them to be very overweight in their protfolio allocation and theriin lies the real problem.

  • Happy Swede

    Nice analogy, totally agree.

    In Sweden we have a whole generation of “housing millionaires” while people borne in the 80’s and later can’t even by a small one-roomer if they do not have parents with money. Incredibly efficient way of segregating a society.

    The housing-as-investment mentality needs to die and be buried deep in my opinion.

  • jt26

    The housing boom, and the tacit promotion of home ownership by the gov, now in retrospect, looks a lot like the criticisms of the IMF during the 70s urging third world countries to borrow to “invest for the future”, which turned out instead to be corruption, theft and debt slavery. The details matter. A similar pattern can be seen in college education.

  • Conventional Wisdumb

    The biggest un-mentioned cost is the transaction cost of selling a home. There is no equivalent financial asset (perhaps precious metals) with transaction costs for the seller that equal 10-15% of the selling price (commissions, taxes, moving costs, fees, etc.). The buyer also incurs significant costs so all around a horribly inefficient asset purchase.

    Secondly, liquidity is directly tied to the business cycle which means when you potentially need it the most it is likely worth the least.

    Housing is an investment when it puts money into your pocket every month, to paraphrase “Rich Dad, Poor Dad”, and in every other situation it is a liability.

  • Andrew P

    Acquiring good developable land at a good price has always been a way to invest. That is where the real money is made – turning open land into houses or shopping centers and selling them.

  • 29

    Moderate inflation and a 30 year fixed rate mortgage makes housing a winner. Deflation and a mortgage makes housing a loser.

  • EconFan

    I think mortgage deduction also makes housing more attractive esp. when folks refinance and use the money to payoff other debt (society benefits from home buying also (better schools, lower crime etc).
    And for many people it is the only leveraged investment(gamble) possible with unlimited upside and limited downside

  • inDC

    It should also be noted the gov’t loves appreciating housing prices because it allows homeowners to access higher levels of cash for consumer goods via vehicles such as home equity loans, thus spurring the economy. As to the inevitable consequences of this debt on the homeowner or society in general, gov’t could care less because they can always paper it over with TARP, HAMP, etc etc. As you noted, the “party” must go on.

  • Anonymous

    It is as good as it will get for the baby boom generation. Government money, zero bound rates……. baby boomers need to be selling into any government strength. Why don’t they?

    Which would you bet on occurring first….. wages rising or rates rising?

  • GSo

    Investing in your own home gives excellent after tax returns over time in most countries. Analyzing without taxes is just rubbish.

  • fin

    Totally agree…

  • Martin

    First, I think Schiller is telling people to not expect the irrational exuberance in the homeownership prices that we saw before 2007. But that does not mean that home prices over the next 10 years will not produce reasonable inflation adjusted returns for those who invest now. My expectation is that home prices will rise modestly in most parts of the US and likely stay even with inflation even in a slow growing economy and despite conservative mortgage underwriting than prevailed in the recent past. There just will not be the flood of cheap credit chasing homes that we experienced between 2002-2007. Second, returns on homeownership are largely a function of financing availability and timing. What has made homeownership an attractive investment over the past 70 years (during which house prices rose moderately in most of the US) has been the availability of relatively affordable long term financing (the 30 year fully amortizing loan) which has allowed the average homeowner to leverage his or her investment at a 4 to 1 leverage ratio. As long as housing prices rise at around the overall rate of inflation, one can generate positive real returns, in the long term even after adjusting for the costs of maintenance and depreciation. But timing is essential. A person like me who bought a home in 1980 with an 80% LTV fixed rate mortgage in a region with a stable, diversified local economy has enjoyed an excellent real return despite the recent price collapse. Those who purchase homes at the top of a real estate cycle however will always experience negative or low returns from ownership. Like any investment timing makes a big difference.

  • Pete

    Housing is more complicated than a simple statement. Yes, there is tax, maintenance cost and upgrade over time. Government subsidizes housing by giving tax break for mortgage interest and taxes. Buying a house is leveraged up to 4-5 to 1 (20%). The price appreciation is leveraged. Yes, when you get caught in a downturn of real estate price, you get wiped out too. Is housing an investment? absolutely yes. Anyone says otherwise will have to explain how a leveraged purchase is not investment. Nobody is leveraged up for the sole purpose of getting wiped out. It is also a required consumption, as everyone will have to have a roof over their head. Whether it is good investment or bad investment is really another question. But for an economist to say housing is not an investment is just incorrect. Not everyone will become a Warren Buffet either.

  • Ted

    Couldn’t agree more.

  • http://None Pete

    By the way, housing is local. If you live in Milwaukee, WI, or Syracuse, NY, the price is never changing. you can forget about investing. If you live in San Franisco, the price is increased 10X in the last 30 years. What Is it if its not an investment?

  • Ian

    The difference between investing in housing (other than one’s own) and investing in some other financial instrument is control. If I invest in stocks or bonds or gold or art or whatever I am probably the least-informed of all, with no control over the outcome, and the most likely to lose out. If I decide to invest in housing it is concrete, discrete, and within my abilities to evaluate; plus I can materially improve my properties, work politically and socially to improve the neighborhood and thus my investments, and be close enough to fix challenges before they become problems. Plus, of course, the tax code is subsidizing my ability to buy on margin. Sure, park a little in an index fund, but for active average-joe investors real estate can’t be beat in the long run.

  • Pepijn

    Since the 1980s disposable household income has been going up faster then inflation thanks to cheap imports from – mainly – China. As a result, people have been spending an ever increasing portion of their income on housing, hence house prices rising faster then inflation. This was further compounded by declining long term interest rates: real estate is an asset similar to a perpetual bond in that it gives an almost fixed annual return (rent) year after year. Add to this a speculative bubble at the end of a long bull market.

    Surely, all effects will go in reverse: families’ portion of income to spend on housing will decline as salaries in China rise faster then in the West. And the long interest cycle will turn one day. This must mean a secular bear market in property

  • Luke

    In classical economics, the three factors of production are land, labor and capital, where capital is defined as the product of human labor used in the creation of wealth. All enterprises must pay the three factors in the form of land rent, wages and capital income. In my opinion, it’s critical to understand that wealth is created through the expansion of the capital stock – that is, by building human-created devices that save us time. The economic system that promotes expansion of capital is capitalism, and I defend this system.

    However, what I defined as capitalism and what most people describe as “free market capitalism” are not the same, and I believe real estate helps illustrate the difference. Real estate is composed of two separate factors: Land and capital (the building). So what we ordinarily call “rent” is a combination of land rent and capital income.

    In my opinion, a person who builds a building and receives income by renting his building is a classic capitalist, and I strongly defend his rights. I do not believe such productive behavior should be taxed. Building capital (the building) with the intent of deriving income is true investment (and hard work) that benefits society.

    But here is where I part ways with most people: The owner of land who derives income from land rent is a mooch. That word may seem strong, but it’s true. A landowner provides zero benefit to the tenant of land. The landowner did not create the land – the landowner simply obtained a government created land title that allows the title owner to extract a monthly tribute from a non-title owner. Markets did not create land titles. Governments did. And as several people observed before me, the real money is in the land.

    But there is good reason to have land titles – because people want to ensure their property is secure so they will be productive on their land. But one class of humans does not have a higher claim on the earth than other classes of humans, so those who claim titles should compensate those without titles. This is why some economists believe taxes on productive achievement (income, payroll, sales) should be dramatically reduced, and taxes on land values (but not buildings) should be increased. This would encourage capital expansion and halt land “investment”, which is not an investment that builds capital, but the exploitation of a government-created title that provides the privilege of rent collection. Just because everyone says our system is “capitalism” doesn’t mean that it is.

    If you find this argument compelling, you’ll enjoy reading Henry George.

  • exertia

    Quite a lively and never-ending topic of debate you have chosen Cullen!

    My advice has been to use this sensible Buy vs. Rent calculator using conservative estimates to see if it makes sense to buy or rent in your area:

    Going by the Zillow values for buying and renting, most of the homes in the SF Bay Area are not a good investment.

  • Sandra Price

    For most people, investing in real estate may not be the smartest or even most efficient investment they COULD make, but seen another way, it’s the investment that most approximates “saving” for the average American. It takes money out of the economy and holds it in the property, and is money that requires very little financial expertise to manage. Whether the property goes up a bit in value or down a bit, the corpus is still mostly intact by the time someone wants to sell it, unless someone is very very negligent in their care of the home, or some surprising turn of fate engulfs the neighborhood. Whatever small loss there is, it is highly likely that the average American is educated enough about other investment vehicles to retain as much of his or her income as she can manage to hold onto through a home investment. This is just my hunch. I’d love to see some numbers on whether this is true, e.g. whether life-long renters of a certain income bracket end up with more money at retirement than home-owners of the same bracket.

  • Sandra Price

    highly unlikely, not “likely”

  • hangemhi

    Wait, wait, wait. You have to pay to live somewhere – right??? So isn’t the investment part the difference in the cost to own vs. rent. And if the two are equal, and your house “only” keeps up with inflation while your monthly carrying costs remain at yesteryear’s levels thanks to your fixed rate mortgage – isn’t that pure profit?

    If owning is more expenses – by how much? Like any investment you need to evaluate it. You need to weigh the pros and cons, assess yourself and your “investing” horizon and risk tolerance, evaluate both the price, market and potential, etc.

    The bottom line, if you don’t treat it like an investment, it won’t be one. Like “investing” in Apple when it hit $700.

  • http://None Midas II

    We had our first house in Midwood, Brooklyn, NY for 26 years, it was bought for $19,500 and sold for $198,000. We bought our next house in Tarrytown, NY for $155,000 and sold it 20 years later for $600,000, 7 years ago. We are now in a small 5 room rural condo. We were lucky to sell in high price markets.

  • John

    Housing – great investment if you have family with kids.

    Lousy investment for singles or couples.


    Other than the obvious “home” it provides with security for kids growing up, all the crap that needs to be fixed gives the parents something to do while needing to stay home supervising and raising the kids!

  • Midas III

    Note: Midas II’s account doesn’t contradict the basic claim that homes are crappy investments for most. Factor in taxes, remodeling, repairs, realtor fees, AND the lost opportunity of investing all that money for 46+ years in higher yielding investments and the picture will clarify.

    We too made out like bandits in the real estate bubbles that hit the SF Bay Area (late 90s) and the DC area (2000s) but that doesn’t mean housing was a smart investment or among the top 10 investment options we might have made at the time.

  • Greg

    Good comment

    Our over reliance on monetary policy since the 70s is the prime reason for this. Monetary policies only consistent transmission mechanism to the general economy is via the real estate market. Thats where most bank activity is directed. Interest rate adjustment = mortgage rate adjustment = disposable income adjustment for the regular guy. The only way MOST people have improved their disposable incomes the last five years is by refinancing their mortgages. Its the only policy available to the average guy. CEOS have cut positions, cut salaries etc to improve their bottom lines, other companies have gorged on govt contracts and guarantees (think defense industry and banks) to improve their bottom line but the average joe has only been able to reduce monthly outlays on their mortgage as a way to feel less of a squeeze. Of course the total outlay for many of us, even after refi, is even GREATER! Refi to a new 30 year and instead of paying back 150,000 you pay back 185,000 (but you get 12 extra years to do it….. how sweet of them!)

  • kyle hipp

    I think thw average person is buying their home for a roof over their head and will not achieve inflation adjusted gains of any significance on average. I personally and in the real estate business. I buy and repair/rehab and rent out. I am able to make money in various ways in which I could not in other investments.

    I can borrow 80% of the purchase price, so my 2% inflation based appreciation is actually a 10% return on my cash down on the property.

    I can depreciate or expense all my capital and gerneral expenses and have those lower my AGI to certain limits.

    I can force appreciation. I can purchase a home that hasn’t been updated since the 1970’s and buy it reflecting that. By updating and improving correctly I can make more money that I put into it to get it there. I don’t have enough money to do that for any stock…

    I can rent out my property. These tenants pay my mortgage and all my expenses as well as provide me a cash on cash return of between 15% – 20%. I always go with a 15 year mortgage to pay down the remaining balance faster. The tax benefit is great but if I can still cashflow this well, I would much rather make $10,000 and pay even 35% in taxes than pay $10,000 in interest to save $3,500 in taxes.

    So in the end, I have it as a fantastic investment but it is run as a business. As you noticed, I didn’t even mention appreciation in the benefits. I don’t use it for my analysis when buying either. In stock investing it is either appreciation or dividends, whereas the options in real estate are much greater. Even with the point of high selling costs, those to can be mitigated but again that is if operating as a business not just a roof over your head.

  • Syd

    I agree, and the Fed has been trying to stabilize home prices through ultra low interest rates and buying agency MBS not only for the wealth effect, but also to protect holders of the existing paper (mortgages and home equity loans) from further losses, i.e., to benefit banks and other investors who hold these loans/securities. These policies also help owners of real estate, e.g., those who have negative equity, but as you rightly point out, if prices are stabilized by Fed intervention at levels that are out of sync with incomes, that’s bad.

  • Syd

    Yes, buying land early in an area that later has massive growth/development seems like it can be a very good investment. For example, buying real estate in the LA and SF metro areas before WWII.
    Location and timing is important though, and at the time of purchase one doesn’t know how it’s going to turn out.

  • Syd

    I think you’re right; for many folks it is a way to safely accumulate savings. They put in a down payment, over time build up more and more equity through their mortgage payments, and it may be a better hedge against inflation than a savings account.

    But as recent experience has shown, people need to buy at the right price, and avoid pulling equity out.

  • John Dolan

    We need to separate the notion of “housing” as an investment versus investing in one’s own house. It’s similar to buying an S&P500 index versus individual stocks (or businesses).
    If one wants to invest in (or short, or hedge) the broader sector of housing, the regional CME Case Shiller futures are an inexpensive, standardized, low-fee product with public prices that one might consider.

  • Jeff Dewhurst

    “Which would you bet on occurring first….. wages rising or rates rising?”

    That is the most succinct, precise, insightful, articulate question about the current financial crisis I have ever seen! After you answer that question all other questions become irrelevant.

  • Robin

    I don’t agree with Shiller at all. He’s ignoring that home ownership forces ordinary people to save large amounts, in terms of home equity, that they just would never have the financial savvy or willpower to do on their own. Renting is not significantly less costly than owning and offers no tax benefits. Real estate is a great long term investment, if it’s treated like an investment. Most people don’t do that. They make poor decisions regarding their homes, as if it is not an investment, when in fact it’s the biggest one they’ll ever make. If you treated a stock portfolio that way, you’d lose your shirt (i.e making decisions based on personal preferences, versus understanding and applying sound business practices.) There are cycles in the stock market just like the cycles in the real estate market. Timing your investment in either discipline is crucial.

  • William Jones

    Does Professor Schiller rent or did he buy a house?

  • Vinie

    “I wouldn’t go so far as to say that real estate can’t be a good investment for some people (mostly experts)” well said, “experts”the very few that prepare for both the downhill and the uphill trend.