Choose Sides in the Real Estate Debate

These days it's impossible to thinkor talk about real estate withoutasking the question, "Are we in abubble?"Since the memory ofthe last stock market bubble and themedia's role in it are still fresh in our minds,this time the media is playing it safe.Refusing to take a position, the media simplyasks "Is this a bubble?"

Time to Decide

Physician-investors can't have it bothways. They have to decide if they shouldincrease their real estate investment bymoving to a bigger house, investing in asecond home, investing in nonresidentialreal estate, or looking for diversified exposuresthrough limited partnerships or realestate investment trusts; or they have todecide to stay away from the current craze.

Irrational Exuberance

One expert who unequivocally calledthe stock market bubble a bubble is Yaleprofessor Robert Shiller. He did so in hisbook (PrincetonUniversity Press; 2000). The second editionjust came out, and it includes new chapterson real estate. Prof. Shiller is one of thecountry's leading experts on real estate.

Housing Perspective

By using data going back to the 1890s,Prof. Shiller shows that contrary to popularbelief, real estate hasn't been a goodlong-term investment. In inflation-adjustedterms, housing prices have posted a negativereal return for the 100-year period1895 to 1995. But real estate prices havegone up like a rocket since 1997—nationallyat an average rate of about 15% peryear. The only other time housing pricesrose steadily in real terms for a consecutivenumber of years was between 1942 and1947. It wasn't followed by a bust, butprices changed very little in real termsbetween 1947 and 1997.

Prof. Shiller also shows that the variousexplanations being offered to justify thehousing price increase don't hold.Although low interest rates have certainlyprovided some necessary fuel to the fire,they can't explain all of the run-ups inhousing prices, especially in the hot areas.

In the end, no one can explain thecause of a bubble in objective termsbecause it is always a phenomenon drivenby herd instincts. Unfortunately, for thesame reason, even if you're right in thinkingthat we're in a housing bubble anddecide not to invest, it may be a long timebefore you are vindicated. The only thingmore difficult than predicting a bubble ispredicting when it will burst.

author of The

Only Proven Road to Investment

Success (John Wiley; 2001) and

Financial Modeling Using Excel

and VBA (John Wiley; 2004), currently

teaches finance at the

Fordham University Graduate School of Business

and consults with individuals on financial planning

and investment management. He welcomes questions

or comments at chandansen@aol.com.

Chandan Sengupta,