In the last post I noted that real estate has not been a particularly good long-term investment, except in the hottest markets, and even there has lagged the S&P500 over the last 25 years. In his research, Shiller has constructed an index based on repeated sales of the same house. The index shows that over very long periods of time (like 50-100 years) housing barely outperforms inflation - house prices do not even keep pace with average income growth (i.e., GDP growth), let alone share prices of companies. Although this is contrary to conventional wisdom, it is what one might expect for an inert asset in a place like the US where population densities are still low. Otherwise, families would be forced over time to spend larger and larger fractions of their incomes on shelter.
But Mr. Shiller has unearthed some rare historical housing data for other countries. Using old classified advertisements, he was then able to fashion a chart for the United States that goes back to the 19th century.
It all points to an unavoidable truth, he says. Every housing boom of the last few centuries has been followed by decades in which home values fell relative to inflation. Over the long term, the portion of income that families spend on their shelter stays about the same.
Builders become more efficient, as they are doing today. Places that were once sleepy hinterlands, like the counties south of San Francisco or a patch of desert in southern Nevada, turn into bustling centers that take pressure off prices elsewhere. Even now, the United States remains a mostly empty nation.
"This is the biggest boom we've ever had," said Mr. Shiller, who bought into the boom himself in 2002, with a vacation home near one of Connecticut's Thimble Islands. "So a very plausible scenario is that home-price increases continue for a couple more years, and then we might have a recession and they continue down into negative territory and languish for a decade.
"It doesn't even attract that much attention," he continued. "There will be many people thinking it was a soft landing even though prices may have gone down in real terms by 40 percent."