Shiller on New York: We're Ancient Rome, Right Before the Fall
Yale economics professor Robert Shiller famously predicted the death of the dotcom boom. He’s been warning about a real estate bubble for years, but now he says New York will self-destruct if prices don’t come down: ‘It can’t keep going like this!’
MORE
The Sit-Down
Location: You’ve been warning of a national real estate collapse since 2005. Do you feel vindicated by last year’s downturn?
Mr. Shiller: Well, I don’t like to use the word vindicated, but it is unraveling as more or less I expected.
When your S&P/Case-Shiller index of home prices came out last year showing record drops, you said things hadn’t been this bad nationally since the Second World War. Yet the sub-prime mortgage scandal hasn’t much affected Manhattan. Are we immune?
Firstly, you’re definitely not immune, OK? Manhattan is a unique place, and that does mean that it has different dynamics, but it’s not immune, I can guarantee you that … If it gets too expensive in New York, people will leave it, no matter what—they can’t afford to live there. And so it’s just not true that New York will keep appreciating independently of everywhere else, I just don’t believe it. Elementary economics say people will always substitute away when the price gets too high, and so they’re doing that.
What will the bursting of the real estate bubble in New York look and feel like?
It will probably start showing synchrony with the rest of the country, and it will happen very gradually, it will start slowing down. If we’re going into a recession, it won’t be that exceptional, people won’t be that surprised.
Our real estate boom since the 90’s is unrivaled, you’ve said, even by the post-war baby boom. So would it be normal, even desirable, for it to end?
It would be a great thing for New York if prices came down, because more interesting people would move in. Your artists can’t afford to live there anymore … They’ll move out of Brooklyn, they won’t be anywhere nearby.
You’ve suggested the Internet boom was ‘a silly, in fact embarrassing fad.’ But will the New York City real estate obsession ever die?
Did you know that the world financial center [of the 1600’s], Amsterdam, created a second city called New Amsterdam? And it’s the world financial center today. Amsterdam hasn’t gone up! It’s the satellite city, called New York now, that’s replaced it … New York will set up satellites; we’re starting to do that with Greenwich and Stamford and I don’t know where else, and it doesn’t have to stay there. The idea that it’s just going to keep going up, especially with the Internet age, which makes communications more easy, I just don’t think it’s reasonable to think it’s just going to keep getting more and more expensive.
So we’ll be replaced?
That’s right. People like urban living, I think we’ll see a movement toward building more urban centers. Manhattan is a symbol for a kind of living that people find very attractive … [Scholars] are arguing that zoning has to be rethought. We have to create new Manhattans, there’s a demand for them. It’s too expensive in Manhattan, there’s no reason why we can’t have a brand-new one somewhere. We just have to build it, plan it all out, a planned city, put it somewhere where land is really cheap, on the coast somewhere with a good location.
A New Yorker wouldn’t believe the city would be replaced! ‘Boom psychology’ is the egoism that investors get during good times. When that dissipates, it’s bad for the economy. So can New York’s cockiness be a good thing?
No, I don’t think it’s a good thing. I think it has encouraged people to push prices up too high, and that creates all kinds of distortions. Unfortunately people have trouble maintaining an even keel; we go through waves of optimism and then maybe excessive pessimism.
If New York’s unique, even among the so-called superstar cities, what’s our kryptonite? What could potentially bring us down?
I was just in Charlotte, North Carolina, at the Bank of America headquarters, and they moved their headquarters from San Francisco. Why did they do that? Because it got so awfully expensive in San Francisco. Of course San Francisco is another superstar city. I asked people [who relocated to Charlotte], ‘Do you regret it?’ What do you think they said? They said ‘No, I have a two-acre lot, and I have a horse, and we just love it here’ … There’s always going to be something unique about New York, but you know sometimes these unique places are surprisingly not expensive.
I’m 23 and making under $30,000, and so of course I hate the expensiveness of this city. And yet I think you’re underestimating New York.
It’s a little bit like Rome. I don’t know if you’ve ever read what Roman historians say: People in that city, I’m talking about ancient Rome, there were poets who extolled it, it must have been an amazing place. I wish I could go back in a time machine, it must have been something! The Roman Empire centralized on Rome more than the U.S. does on New York; in fact their whole country was named after Rome … They definitely had great feeling for that city, and it’s still there, and it’s still a neat city. But it went through some bad periods, if you look at history: Really bad periods when it fell into decay! So it’s kind of up and down, and I think that’s the typical history of cities. Rome has not always been expensive.
What’s the psychological factor to a real estate bubble?
The human species is very empathetic; they connect with each other … We get the excitement—you get a sense of excitement of a boom. I was in Silicon Valley in the late 90’s, and I was at the hotel breakfast, listening to people at the tables, they were hatching these excited businesses, all sitting on the edge of their seats. There was a sense of euphoria, and it does infect everyone else. Next Page >
408 East 79th Street
BARGAIN CONDO DEAL! $900s PURCHASES a SUNNY 1BR/ 1.5 BTHS IN NEW... More details |
|
He's right, you know. The sooner a controlled collapse occurs, the better. God help us if we become like San Fransicko more than we already have.
It's all basic economics. I feel bad for those who bought at the top of the market, but hey, that's the way it goes.
I really don't think that it takes a yale professor to predict that most markets are cyclical. If he has been warning of a housing bubble since 2005, wasn't he wrong for 2 years? why doesn't he start predicting that the housing market Arizona will get better over the next 5 to 20 years? The prices in Manhattan can't go up forever......thanks Nostradamus!
Since 1930, when my Greatgrandfather, Grandparents, Mother and Uncle moved from E. 89th Street and Fifth Avenue to North Plainfield, New Jersey there has been a prediction prices in Manhattan would go down. NEVER HAPPEN! Moreover, since 1980 major cities WORLD-WIDE have had a steady increase in prices, while since before 2000 prices have gone out of control nearly everywhere. As someone who lives in Europe and North America, and now partly in Asia, I can say with a straight face, the DECREASES in areas such as South Florida are from such high levels to be meaningless.
As a former West Sider, resident of Murray Hill, Chelsea, and the Village, who still visits former neighbors at all four locations, don't tell me prices in any of these neighborhoods are going down except for a few examples, where the units were so hugely overpriced units, that some adjustments had to be made.
Take 1980 or 1990 rentals, add inflation, figure 6% to 10% return on the value of the property, add the cost to make the building a coop or condo, then compare that price, plus 25% profit for conversion to what the units would cost now!
Bet the units are 500% times what they should be! So a reduction of 20% in the price is MEANINGLESS.
No. The RE bubble began to deflate in 2005. Last year, we had our first nation-wide year-over-year decline in house prices. This year, the for-sale signs and depreciation are so prevalent that few can deny it any longer. Besides, when Shiller first began to call the housing bubble, he didn't say "This bubble will pop tomorrow", he simply made the assertion that it will pop. In other words, he counseled against buying at the top. He was right.
@JPJoe
Actually if he predicted a bubble in 2005 he was probably perfect on the timing...
Just because you are only appreciating a bubble now, doesn't make him wrong on the timing.
Secondly, even if he were wrong on the timing:
the real estate market can stay irrational longer than an investor can stay solvent at times!
Third,
The prices in New York have possibly been propped up by the
weak dollar. Wealthy foreigners tend to like this city more than some others, right? So one would have to adjust for the weak dollar, I would think...
NOT INVESTMENT ADVICE, I KNOW NOTHING, DON'T LISTEN TO ME, I AM NOT A FINANCIAL PROFESSIONAL OR GURU.
in response to count chodkiewicz - I notice you didn't mention Harlem or Brooklyn. Those neighborhoods went down in relative price for decades. When I was growing up, parts of Harlem were burned out from arson. Why do you suppose that was?
in response to count chodkiewicz - I notice you didn't mention Harlem or Brooklyn. Those neighborhoods went down in relative price for decades. When I was growing up, parts of Harlem were burned out from arson. Why do you suppose that was?
Chodkiewicz Chudzikiewicz, guess you haven't done much research... unlike Professor Shiller.
Property prices generally go up at the rate of inflation. There's hundreds of years of data to back this up.
What happens to Manhattan after the investment bank bonuses disappear?
'there has been a prediction (since 1930) prices in Manhattan would go down. NEVER HAPPEN!'
You must not remember the 1950's, 1970's and even the mid 1990's when Manhattan real estate could be had for a song. The 50's and 70's were primarily the result of people leaving the city. (NYC lost a million residents). Mid-1990's price plunge (inflation adjusted prices fell by about 60%) was the result of massive overbuilding during the preceding boom.
There have been blips in the Manhattan RE for the past several years, the major ones being right after 9/11, then in 2005.
Relative to other major financial centers in the world, Manhattan RE per square foot is not so high (London, etc.)
Could be with a downturn, recession, we could see a modest decline of 3-5%. But we're not heading for a depression and things will invariably go up again, probably later this yea or in 2009... perhaps on a more gradual basis.
Re Charlotte and other places. They are great places and have been growing for years. But the population is growing as well, and there's a lot of room for Charlotte's and Manhattan.
One other point: There are clearly more people currently priced out of Manhattan RE than priced in. And they'd love to talk the market down. It's sort of a proletarian vulture capitalism. Articles like this contribute to it. NYO has every right to spin Shiller's words whatever way it wants. But I do think the mixed motivations of the writers of these articles should be considered.
Anyone who thinks Manhattan real estate can't go down should take a look at prices in Tokyo in the '80s compared to now.
Odd comment. What did you want him to do...predict a downturn precisely at the moment it was happening? I don't think that would qualify as a prediction.
After living more than 20 years in L.A., I never thought I could be happy in a city that wasn't as exciting. For a number of reasons, D.C. doesn't cut it for me -- I'm a West Coast gal. But if I were an East Coast gal and liked cities, these days I'd go to Pittsburgh or Baltimore. Progressive politics and artist-friendly. Lots of beautiful old housing. With the Internet, cable and coffee shops, mid-size cities can be a lot more interesting for middle-class folks than expensive ones dripping with conspicuous consumption by the world's rich. The Great Depression II is coming, folks -- time to get ready.
JPJoe (not verified) says:
I really don't think that it takes a yale professor to predict that most markets are cyclical. If he has been warning of a housing bubble since 2005, wasn't he wrong for 2 years? why doesn't he start predicting that the housing market Arizona will get better over the next 5 to 20 years? The prices in Manhattan can't go up forever......thanks Nostradamus!
January 16, 2008 4:23 PM
--------------------------------------------------
My, my. Impeccable logic joe. I guess you live in Arizona and are left holding the bag?? What is it you dont understand? The RE bubble is much more than a "cycle". Shiller is attempting to bring a little rational thought to a bubble market. Believe it or not, there are still many people who do not believe the price of thier home/apt will go down! When Shiller called this in 2005 he was villified.
It's all demand Vs. supply. The Great Debts Boom in the last 7 years, has attracted so much money and many people to the big cities where the financial institutions thrive. The soft money from foreign coutries flow into these institutions and unto their employees. Now that the global credit crunch has spreaded so deep, the foreign soft money has dryed up. The huge bank/brokerage writedowns and lay-offs are just the tip of the iceburg. The recession has started to show in 2008 along with more huge inflations. This recession is much different from the others. When a bad inflation goes along with a recession spells an implosion of the financial structures. Just like Germany and Russia after WWI, then facists or communists stepped in. Either way is bad for the capitalism. The outcome will be 99% of the population struggling with monthly bills, only a handful of super riches can afford the multi-million condo living in the big cities. Therefore, the scene in NYC after 2010 would be a few high-rise high-priced condo bldgs surrounded by old apartment slums full of un-emplyeed people. Yes, it almost looks like 1930 again.
Everything that I hear indicates we are headed for a major recession. My Mom worked for a builder that went under this year owing her 16K - she'll never see it. Contractors not getting paid. My Dad sells building materials. Many contractors going under because their not getting paid. My friend is a contractor - he is getting stiffed by homeowners. Have friends that work in the moving industry. They are somewhat busy for this time of year, but they don't move as much weight as they used to for a typical home. Many houses don't even have dressers or any furniture to move. Mostly use plactic containers for all the childrens clothes. My industry has been down due to no more ethanol plants being built. My brother's industry is down(wire & cable). Many counties & states are broke & raising taxes. IMO - Housing prices will crash all over the country in the next 2 years...
Read Mike Davis: City of Slums
I predict Nuevo Yawk will eventually tank just like the rest of the country. Anyone here old enough to remember the 70's?
It has farther to fall, and also it will take longer. But the tipping point will be reached. For edumacational value, watch how fast Macklowe (sp?) is tap-dancing to pay off those bridge loans by selling off all of the properties he just overpayed for (the GM building included).
Prof. Shiller isn't the only one to make this prediction. These two carpetbaggers:
http://online.wsj.com/article/SB120036645057290423.html?mod=todays_us_no...
http://online.wsj.com/article/SB120036270913390155.html?mod=Leader-US
... recognized what was happening, bet money on it and have handsomely profited.
So it would seem as the herd moved one way, a few realized they could take advantage.
I owned a 1 bedroom on the upper east side from 87-93. I had it on the market for 2 years and I couldn't sell it. Finally I took a 27% loss to get rid of it. Everything is cyclical.
The lowlands of Manhattan will decrease in value over the coming decades because the rising sea levels will cause them to flood more and more frequently and then eventually become part of the expanding waterways. As this comes closer, people will avoid these areas even before the problems become obvious so values will decrease. Buy on high ground only.
The fact that he predicted the bubble at the height of the bubble makes him pretty darn accurate in my eyes... 2006 and 2007 have seen the declines get progressively worse... he also said the same thing about the dot com bubble in 2000 which, again was the peak of the bubble... Infact no other economist has been as accurate as Bob Shiller over past few years!
Our whole country is dying. We no longer have a manufacturing infrastructure to create our basic needs. Our wealth is going to the highest bidder outside our country. Our food supply in the Midwest is owned by international companies. Our natural resources are being raped. We need to remember who the people are that sold us out to the Global Market. The time will come when the kids in the school who have been brainwashed to hate their own country. Where sodomy between males is more important than George Washington will wake up and realize they have been betrayed and there will be blood.
Wow...you had my interest at first, but at the end I think you went a tad over the top....
what does gay sex have to do with the economy?
Here are some quotes from an article in The Real Deal regarding foreign buyers. This is genius.
"most of the Irish buyers she deals with purchase one or two apartments at a time, and they don’t even travel to New York beforehand."
“Even if they could afford to buy in Dublin, they could not get rent anywhere near what they get here,” [the broker]said in the article.
If ever there was a peak, this is it.
Foreign money is truly dumb money. Rents don't even come close to covering carrying costs in NYC. The local economy is sinking, Wall Street is abysmal, but god bless idiots from Ireland who will overpay for overpriced properties, sight unseen.
I think Prof Schiller has hit the nail on the head in his analysis that "We're Ancient Rome, Right Before the Fall"
Historian Toynbee long ago drew a parallel between the Roman empire and the US. Permit me to quote my review published in the Sunday Standard, India of his book "AMERICA AND THE WORLD REVOLUTION: By Arnold J.Toynbee: (Oxford University Press; 12s, 6d.)published in 1963:
"AMERICA AND THE WORLD REVOLUTION: By Arnold J.Toynbee: Oxford University Press; 12s, 6d.
" This book embodies Dr. Toynbee’s lectures delivered at the campus of the University of Pennsylvania in Philadelphia under the auspices of the Department of History. It comes as an invigorating whiff of air giving a fresh lease of life to our senses deadened with constant shuttling between cold war and hot brinkmanship.
Isolated
It is an astute and urbane analysis of the world situation today with a particular reference to America. These lectures are all imbued with a broad and generous historical perspective. Dr. Toynbee’s main thesis is that America, having given the world a revolutionary lead in her early days of freedom has lost its trail, and become enamoured of herself, isolated herself-an hadicap of affluence, has initiated a new imperialism, and has become in fact, “the leader of a world-wide anti-revolutionary movement in defence of vested interests.”
Dr. Toynbee absolves America of any conscious imperialistic designs in so far as annexation of alien territory by conquest is concerned. But instantly points out that brazen aggression has not been the only means to wax imperial in the history. History has seen subtle and more insidious methods to achieve the same end. He cites the parallel of Roman empire, which grew apace by her strategy of harboring the weaker neighbours and protecting them against their stronger neighbours. All that the protector demanded of the protégé was a patch of land where he could plant a fortress, or a base in the modern military terminology.
Dr.Toynbee does not suspect any ulterior motives in this eminently honourable statement; but as an historian, he submits, he cannot shut his eyes to the later course Roman empire took when these honourable allies turned into just parts of the Roman empire.
Pursuing his argument in a bland, Antonian manner, Toynbee views with concern and obviously anxiety Americas serious attempt at the acquisition and retntion of bases on allied territory. He observes that this strategy has a “bearing on the evolution of the American Empire.” Thus, he drives home the fact that America is becoming an empire-builder in spite of herself. But there are grave dangers in this strategy, foremost being that the allied territories having American bases run the risk of being annihilated in case of discord between U.S.A. and Soviet Russia. With a devastating irony. Dr. Toynbee parodies the famous slogan ‘no taxation without representation,’ to read as “no annihilation without representation” and reveals the mute helplessness of the allies.
He refers here to the U-2 sortie from the ‘installation’ at Peshawar in 1960 which raised acutely the “question of who is to have the last word in taking political and military action which are literally matters of life and death for America as well as for her allies.”
But this somber picture of modern American imperialism has a saving grace according to Toynbee, and it lies in its unique innovation of giving economic aid to the allies. But one does not help feeling that this imperialist morality is of little consequences so long as the choice of annihilation vests with the host country. At best it looks like fattening the calf before the slaughter day.
But nevertheless this innovation has given a healthy lead to other nations in the post-war world, and there is a competition today between U.S.A. and Russia to win friends and make allies by this novel method of economic aggression. Toynbee thinks that it has converted imperialism into a beneficent instrument for redistributing wealth. According to him America has been a pioneer again in this novel world revolution.
Handicapped
Yet Dr. Toynbee feels that America is seriously handicapped in this economic warfare, paradoxically, by her affluence and race-feeling as well. He illustrates his point by attacking the consumer goods centered American productivity so effectively shown to be a bad myth of economic prosperity in Prof.Galbraith’s “Affluent Society.”
Also, Americans are handicapped by a superior race -feeling, and they tend to live abroad in a carefully cultivated American shell avoiding scrupulously the native touch. This Toynbee feels creates a psychological barrier and he calls for the cultivation of secular, missionary spirit in the Americans abroad.
In a more serious vein, Dr.Toynbee traces down this handicap to be a serious defect in the whole Western way of life as such which has become to a large extent Americanized. Nothing short of a regeneration of character would remedy this evil.
Dr. Toynbee feels that American affluence and consequently the insularity of outlook has estranged her from her erstwhile glorious ideals. But even now, he thinks, it is possible for America to rejoin her revolution by transferring the productive power “from catering for bogus wants of the Western minority to supplying the genuine needs of the non-affluent majority of mankind”
He poses an important question: “What is the true end of Man?” and answers, “The true end of Man is not to posses the maximum amount of consumer goods per head.” He points out that “the end of human life is spiritual… No man liveth unto himself and dieth unto himself.” But before a man can pursue his spiritual aim he has to satisfy a minimum of essential physical needs, and for this purpose Toynbee calls for a radical change in American economic approach. He perorates prophetically:
“When the ideologies have evaporated and when Man’s long unsatisfied hunger for material possessions has been appeased, and when Man has also been cured of his temporary gluttony by satiety, then, I believe, the ideals and the precepts that are embodied in the historic religions will come into their own at last”
In freshness of appeal and the magnanimous humanity of outlook this book is a most valuable contribution to historical world perspectives."
Count LF Chodkiewicz Chudzikiewicz
History says your wrong, see the link below
http://query.nytimes.com/gst/fullpage.html?res=9D0CE1DB1531F93AA1575AC0A...
TYRANNICAL GOVERNMENT CAUSED RECESSION AND INFLATION
The tyrannical Neo-Con and Neo-Lib dominated government must start paying for the un-constitutional Iraq War, and the subprime mortgage lending and stock trading scam, by printing billions of dollars; thereby subjecting the government betrayed American People to systematic ruinous recession and inflation.
No, he wasn't wrong, he was right, except no one would believe that the market would do anything but go up, forever. Look at the blogs on the mortgage crisis, the majority of the loans in trouble were written in 2005 and 2006.