Wednesday, December 21, 2011

My Real Estate Agent’s Recent Housing Market Explanation

I recently got one of the regular monthly newsletters that our real estate agent (the one we bought and sold our first home with) sends out to former and current clients. This month’s letter was touting the “return” of the real estate market. In the letter, it said, “…real estate has been, and will continue to be, a good long-term investment.” Her words, not mine…definitely not mine.

To prove these words, she included a short, two-page pamphlet entitled “Why Real Estate is still America’s Best Investment”. Here are a few of the things I found interesting about this pamphlet and its explanation as to why real estate is still the “best” investment.

Full of Statistics
Statistics can be valuable tools in finding trends and helping to make decisions based upon all sorts and varieties of factors and data. However, the bad thing about statistics is that that can be warped and molded by the people and organizations utilizing them to make statements, jump to conclusions, and otherwise manipulate data to fit specific outlooks and motives.

The pamphlet this included in our real estate agent’s letter was packed full of statistics touting the long-term advantage of being a homeowner. From increasing rates in homeownership trends to changing demographics, the outlook appeared to me to be saying, “Since more people have been doing it lately, it’s still a good investment,” which I don’t tend to agree with. More people are getting college educations, but that doesn’t mean the quality of the education is getting any better.

Another statistic was about the increasing amount of long-term home equity homeowners were building. Once again, I find the statistic laughable, since I can buy a new car with little money down and continue to “build equity” in that vehicle, but that doesn’t mean the vehicle will be a good “investment”.

“Irrational Exuberance”
I loved the portion of the pamphlet that reviewed home values during the last 120 years. There was a chart -- with prices adjusted for inflation -- that tracked home values from 1890 ($100,000) to 2010 ($126,000). Not all that impressive a jump in my opinion...especially for 120 years.

I also loved the fact that this data was taken from the book by Robert Shiller entitled, “Irrational Exuberance.” Maybe they were hoping no one would look at the name of the source they used, list in tiny print below the statistic. But I guess the takeaway from this chart was supposed to be, (again in their words, not mine)…

“…Values Still Historically High”
Okay, given, the values are higher after adjusting for inflation, than they were 120 years ago. However, this is kind of like saying say my net worth is “historically high” compared to 10 years ago or 20 years ago. That doesn’t mean I’m wealthy or even well off, it just means I’m in slightly better financial shape than I was when I was in college or high school -- big deal! That’s not saying much…in my opinion.

“Irrational Exuberance,” 2nd Edition, 2006 by Robert J. Shiller

“Why Real Estate is still America’s Best Investment”. 2011. Buffini & Company

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