M.D.C. Holdings, Inc. (MDC): Don’t Expect to Retire on Your House

Dr. Shiller: The housing boom in the early 2000s was driven by a sense that housing is a wonderful investment. It was not informed by good history. If you look at the history of the housing market … Capital gains have not even been positive. From 1890 to 1990, real inflation-corrected home prices were virtually unchanged.

Morgan Housel: So is that what homeowners should expect going forward? That their house will give them a place to live. It will keep up with inflation and nothing else. Is that the basic model that homeowners should think about?

Dr. Shiller: I think it’s a reasonable first approximation to assume that home prices will just keep up with inflation. There are concerns that they will do something different. People are very focused on the possibility that there will be another boom, which is possible if we are thinking over the tenure of one’s ownership of a home, it’s very hard to say what they will do, but I think we should also consider the possibility that home prices will decline in real terms over the next few decades.

Why is that? Well I think you have to reflect on the fact that it’s done it before. Home prices declined for the first half of the 20th century in real terms. Economists discussed that back then. Why are they going down? The conclusion, if there was any consensus in say 1950, was … of course home prices go down. There’s technical progress. They are a manufactured good. Back in 1900, homes were handmade, you know, craftsmen. But now in 1950, we can get all kinds of power tools and prefab and they were just better in 1950 than we were in 1900, so of course they will go down.

From that frame of reference, I think maybe that’s exactly what we should expect, too. It’s just a manufactured good, and progress is always happening. And on top of that progress, there’s the outmoding, the out-of-style factor. So what kind of houses will they be building in 20 years? They may have lots of new amenities. They will be computerized or something in some way that we can’t anticipate now. So people won’t want these old homes. To me, the idea that buying a home is such a great idea is just wrong. They may very well decline for the next 30 years in real terms.

The article Don’t Expect to Retire on Your House originally appeared on Fool.com and is written by Morgan Housel.

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