Sunday, April 14, 2013

Predicting Changes In Home Prices

Robert Shiller is one of the originators of the Price-Shiller index that tracks changes in home prices.  He does not believe that homes should be regarded as investments.  Homes should decline in value because they wear out and become less fashionable over time.  Construction costs have also declined as construction has become more productive.  Homes built in the future will be less expensive to build than the home that you own.  Most of the increase that we have seen in home prices over time is due to inflation.  There has been little real growth in home prices when prices are corrected for inflation.  Of course, home prices are subject to booms and busts.  Prices usually fall back the where they were before the boom when the next bust occurs.  Its hard to predict when the next boom will occur.

Stocks are a better investment because firms will use some of their profits to invest in growth.  Profits should increase over time and that should be reflected in stock price appreciation.  Of course, some firms will not make productive investments but the stock market, as whole, should appreciate over time.  The combination of stock price appreciation and dividend payments provides a better investment opportunity than investing in a home.  We should view home ownership as alternative to renting. 

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