Don’t Ask a Journalist to Explain Real Estate Economics to You, Part I

No offense to David Streitfeld, but I won’t be asking him to manage my investments anytime soon.

Streitfeld, a New York Times reporter, declares, “Real Estate’s Gold Rush Seems Gone for Good.” He interviewed several economists who warned that “home ownership will never again yield rewards like those enjoyed in the second half of the 20th century” — or, at least, that’s the conclusion he drew from the interviews.

Streitfeld asked all the right people. Dean Baker told him, “People shouldn’t look at a home as a way to make money because it won’t.” Robert Shiller said, “People think it’s a law of nature” that home prices must go up, but it isn’t. Barry Ritholtz warned, “People shouldn’t be holding their breath waiting for it to happen again.”

All three of those guys predicted the housing crash. They know what they’re talking about…but does Streitfeld?  

I’m wondering what Streitfeld will report when prices go up again. Will he conclude he was wrong and buy real estate, or does he understand how housing bubbles work?

I don’t mean to pick on Streitfeld. He did a good reporting job, just not good enough for the average reader to prepare themselves for the next bubble.

Prices will go up again. Not today. Not tomorrow. Not this year. Maybe not for a long time. But another housing bubble will happen.

The way I know is because real estate has been cyclical for at least the last century. Contrary to what Streitfeld says, it’s not a new phenomenon. A real estate bubble preceded the stock market bubble of the late 1920s, and many economic historians believe it’s the combination of the two that caused the Great Depression.

Streitfeld’s article makes it sound like we went through a phase — growing pains, if you will — and it’s over now. It’s not. It’ll happen again…and it’ll implode again.

When homeowners and investors take leave of their senses again — as they have over and over and over and over in economic history — I hope Streitfeld writes about what Baker, Shiller, and Ritholtz really meant: Real estate doesn’t appreciate (in real terms) over the long run. Don’t get caught up in the next “gold rush.”

Update: Ritholtz makes roughly the same point in a different way: “I was surprised when he mentioned I was one of the more bullish housing analysts he spoke with! My answer to that was the time to be an über-bear on Housing (or anything, really) is before the collapse — not afterwards.”