How We Can Escape This Mess - Kiplinger.com.
This article is an interview with Robert Shiller, author of several well-known investment books and creator of the S&P/Case-Shiller Home Price indexes. He makes several excellent points in the article, of which I both agree and disagree:
1) The government needs to run up a big deficit to counter the lack of spending by consumers. He claims this didn't happen during the Depression because the initial stimulus failed making additional efforts politically difficult. This is a classic Keynesian argument that the government must increase spending during a recession. However, Keynes also believed that spending should be reduced during an expansion. As a skeptic of government, I find it difficult to imagine a scenario under which expanded spending now is effectively curtailed in the future.
2) He believes in additional programs to help homeowners avoid foreclosure. He portrays homeowners as being misled by government (or displacing their responsibility on the government, you choose) into buying a home. I'm sure this is true for many, but I'm also sure many, many more fully understood what they were doing and proceeded to over-leverage anyway.
3) Housing prices have not increased in real terms in 100 years. This is a valuable point - always assume your home will appreciate at the rate of inflation and no more. Assuming you've leveraged your home (via mortgage) roughly 5 to 1 (20% down) and are paying regularly on a 15 year mortgage, your home will be worth roughly a little more than 1.5 times what you originally paid at the end of 15 years. However, you'll have gone from 20% equity to 100% equity during that time so the asset will have a meaningful value to you.The return on equity is roughly 14.5% annually. Consider, a $300,000 home would be worth $467,000 in 15 years at 3% appreciation (assumed inflation rate based on historical average). You put down $60,000 and 15 years later that original $60,000 is worth $467,000. I know you've made payments and paid interest so the IRR won't be as high. Yet, at the end of 15 years you have an asset worth almost half a million. The point is having your own home and an asset that appreciates at a rate similar to inflation is worthwhile, just be sensible about the initial economics. Buy one you can afford.
4) The markets may be fairly valued but its difficult to confirm."The feeling that the market is not safe is a major cause of it not being safe". Yep.
5) Inflation is a risk - "I see a scenario in which inflation picks up because people start to expect it". Absolutely - expectations about the future drive the economy and markets much more so than actual results.
6) Treasuries may be the next bubble. I have no reason to argue with that statement.
Click on the link above to read the whole story.
This article is an interview with Robert Shiller, author of several well-known investment books and creator of the S&P/Case-Shiller Home Price indexes. He makes several excellent points in the article, of which I both agree and disagree:
1) The government needs to run up a big deficit to counter the lack of spending by consumers. He claims this didn't happen during the Depression because the initial stimulus failed making additional efforts politically difficult. This is a classic Keynesian argument that the government must increase spending during a recession. However, Keynes also believed that spending should be reduced during an expansion. As a skeptic of government, I find it difficult to imagine a scenario under which expanded spending now is effectively curtailed in the future.
2) He believes in additional programs to help homeowners avoid foreclosure. He portrays homeowners as being misled by government (or displacing their responsibility on the government, you choose) into buying a home. I'm sure this is true for many, but I'm also sure many, many more fully understood what they were doing and proceeded to over-leverage anyway.
3) Housing prices have not increased in real terms in 100 years. This is a valuable point - always assume your home will appreciate at the rate of inflation and no more. Assuming you've leveraged your home (via mortgage) roughly 5 to 1 (20% down) and are paying regularly on a 15 year mortgage, your home will be worth roughly a little more than 1.5 times what you originally paid at the end of 15 years. However, you'll have gone from 20% equity to 100% equity during that time so the asset will have a meaningful value to you.The return on equity is roughly 14.5% annually. Consider, a $300,000 home would be worth $467,000 in 15 years at 3% appreciation (assumed inflation rate based on historical average). You put down $60,000 and 15 years later that original $60,000 is worth $467,000. I know you've made payments and paid interest so the IRR won't be as high. Yet, at the end of 15 years you have an asset worth almost half a million. The point is having your own home and an asset that appreciates at a rate similar to inflation is worthwhile, just be sensible about the initial economics. Buy one you can afford.
4) The markets may be fairly valued but its difficult to confirm."The feeling that the market is not safe is a major cause of it not being safe". Yep.
5) Inflation is a risk - "I see a scenario in which inflation picks up because people start to expect it". Absolutely - expectations about the future drive the economy and markets much more so than actual results.
6) Treasuries may be the next bubble. I have no reason to argue with that statement.
Click on the link above to read the whole story.
