William Wheaton MIT Professor on Real Estate

Over the week end I had an exchange with a commenter on another blog about the future of Real Estate prices. He referred to Professor Wheaton who thinks Real Estate prices will begin to rise when the surplus inventory of housing units is depleted. His term, in an NPR interview, was sopping up excess housing inventory because housing construction has slowed.

The interview was actually about foreclosures. Professor Wheaton looks at the period between 2005 and 2008 as an isolated incident of exuberance. I have a different point of view, but for right now let’s put up the original work the Professor had about Real Estate cycles

http://econ-www.mit.edu/files/2396

It’s long, but in the middle he does allow for Real Estate agents to determine future values. I actually refer back to this paper, and have for many years. It outlines some formulas for establishing values.

http://econ-www.mit.edu/files/3780

In this second paper Professor Wheaton discusses the housing bubble. By taking a wide variety of factors, which include low interest rates, he is making some strong arguments that are contrary to his over supply theory. He has charts showing the spike in home ownership, and second home purchases. His charts stop at 2005.

His new paper http://econ-www.mit.edu/files/3782 mostly rehashes his belief that old patterns of home ownership will continue, even though he shows that renting is on the rise. He touches on foreclosures, but never directly addresses the issue head on.

Professor Wheaton has been a defining voice for Construction, Construction costs, Commercial Real Estate, and now, the housing market in general. These samplings give you an idea of his point of view. He thinks Real Estate prices will keep rising. From what I’ve read there is a much better chance the strategy of owning Real Estate will change, or go back to more conservative investment. 

 Low interest rates are an indication that inflation is a distant concern. Without inflation we are left with price reductions in real, present day, dollars. In my opinion, that’s the formula for further economic contraction. When you buy, price will be much more important than the payment. Your payment should only be geared to your ability to pay off the property you purchase.