|04-05-2016, 12:25 PM||#1|
Join Date: Jan 2006
Real Estate Literature Review
Rascoff, Spencer and Stan Humphries. Zillow Talk: The New Rules of Real Estate. New York: Grand Central Publishing, 2015.
Shiller, Robert J. Irrational Exuberance. Princeton, NJ: Princeton University Press, 2000; 2015.
Rognlie, Matthew. Deciphering the Fall and Rise in the Net Capital Share. Washington, DC: Brookings Papers on Economic Activity, 2015.
Much of Rise in Income Inequality Can Be Explained By Growth in Housing Income.
Income is generated by two means: capital and labor. In his bestseller, Capital in the Twenty-First Century, Thomas Piketty argued that since income generated by owners of capital has historically grown much faster than income generated by labor, and capital grows faster than the economy overall, capital will become an increasingly larger share of GDP, and the wealth differential between owners of capital and labor will compound until it reaches disastrous levels.
Twenty-six year old Mattew Rognlie, a doctoral student at MIT, picked Piketty apart (2015). He pointed out that Piketty used gross not net!
Net Capital = Gross Capital - Depreciation
When Rognlie looked at net capital share, all of the growth in capital went to housing. The non-housing sector's share of total income did not grow at all. And since house ownership is widespread, the danger that wealth concentration will continue to compound is unwarranted.
Historically, Housing Prices Did Not Exhibit an Upward Trend
Nobel Prize-winner Robert Shiller, perhaps the world's authority on real estate economics and an uncanny prophet of bubbles, compiled data that showed that unlike the stock market, housing markets in the United States do not trend upward over the long run (2010; 2015). On its face, this appears to contradict Rognlie's thesis that housing is responsible for the increase in net capital share. But it doesn't at all, for three reasons.
First, Rognlie's analysis extends back only to the post war period. Shiller's data goes all the way back to the 1840s. Shiller's data shows that housing prices since World War II has experienced a rise. It fell sharply during the interwar period due to the Great Depression and an epidemic, then rose again.
Second, as Nobel Laureate Robert Solow noted about Rognlie's paper, Rognlie focuses on housing as "productive input." That means Rognlie treats housing like a lemonade stand; the returns come from renting your house out. Just as you don't expect to make money from selling your lemonade stand for more than what you paid for it, you expect to make most of your money in real estate from renting your space out. As practitioners of real estate will tell you, rental income is what you invest mainly for; appreciation is a plus.
Finally, the quality of Shiller's data in the earlier years can be questioned. He acknowledged that it will be improved upon.
Last edited by ChinoCoug; 04-07-2016 at 06:17 PM.