Case Shiller is not a new type of luggage

One of the few people who called the housing boom correctly is Robert Shiller, an economist at Yale University. In his 2000 book, Irrational Exuberance, he warned against the run-up in home prices. His work is prescient in forecasting the housing boom and warning against the excesses of lose lending regulations, etc. Yet, in the peak of boom, Shiller was regarded as a pariah. Who want to hear about the buzz kill during the boom! His was clearly the minority options. People just didn’t want to hear the bad news! Instead, they blindly proceeded ahead.

The Case-Shiller Home Price Index is now belatedly accepted as the standard for the real estate industry. Your best resource for information on housing trends is Case Shiller.

Just imagine for a moment if you’d taken Shiller’s advice seriously. Imagine that you disinvested all your real estate at the top of the market in 2006-2007 and now had cash to be bargain hunting at the bottom of the market, as what is potentially a long, slow rebound commences? What would you look to buy?

One thing will always remain true, no matter the overall state of the housing market: homes that share basic, sound characteristics will be valued higher than homes without them. What are some of these characteristics? The classic one is location, but there are others like condition, configuration (number of rooms/types of rooms/size of rooms), and finally there is finish – the quality and “style” of the home.

In a market full of distressed properties, BuildSmart helps home buyers to identify valuable properties – valuable now, and ones that will maintain their value over time. Our background in architecture and contracting give us unique insight on our client's behalf to create a home solution that fits their needs, and holds its own, even in a turbulent marketplace.

If you're a home buyer, contact us today to experience our value-based real estate solutions for your next home purchase.

Real estate behaves just like any other market

One of the startling thinks about the real estate boom were the number and variety of sources proclaiming the soundness of the real estate market.

Once this positive feedback loop starts, it takes on a life of its own and quickly, we are not responding to the underlying market but just participating in the feedback loop.

To see how this happens, look back to the boom and see:

Marginal buyers buy houses > Demand increases
Demand increases > More houses get built >
More houses get built > The stock of the public builders rises

This story inevitably gets reported as “Huge demand fuels builder stock bonanza!” and confirms everyone’s assumption about the health of the housing market. Without understanding the story behind the headline, you’ll just be participating in this feedback loop and not making good decisions, etc.

Remarkably, the housing boom obscured almost everyone’s perspective, sure, home buyers and small investors got caught up in the euphoria, you’d expect that but large, sophisticated investors that should have known better also got caught up in the hysteria.

The housing crisis explained

Reading the statistics about housing’s collapse, it’s hard to imagine how we all got here, but here we are. While it’s tempting to lay the blame at greedy mortgage brokers, ill-informed home buyers, crooked appraisers, etc. The fact remains, there is enough blame to go around. Seeing the extend of the demand for housing people and companies stepped into the breach to offer new, more exotic home loans, looser qualifying, etc. The “how” of this all came about is now clear to see, the “why” it came about is will be debated endlessly.

We believe that one reason we became over-invested in housing has historical antecedents. What’s interesting about our current malaise about housing, is how much of it can be laid at the feet of the first great housing crisis in America during the great depression. Surprisingly, until that time, most people rented homes. Because of steep down payment requirements, most people simply did not have the cash required to afford a down payment. That meant that those who participated in the market were actually financially capable of participation. If you didn't have enough money saved for a down payment, you simply couldn't buy.

We faced this same scenario as a prelude to the current crisis: people wanted to buy homes, but really, their incomes couldn't afford it. So what did the industry do? Created an entire marketplace based on sub-prime credit levels. Now everyone could afford to play. In a world where housing prices only go up, this is a beautiful thing. But as we learned, housing prices actually fall now and then. And sometimes, when the foundation is poor enough - they collapse.