Farmland best bet in gloomy outlook, says Yale's Shiller

May 22, 2011 @ 12:01 am

By Jeff Benjamin

With the exception of farmland, investors should keep their expectations for investment returns low for at least the next 10 years, according to Robert Shiller, an economics professor at Yale University.

Speaking during an opening session of the Investment Management Consultants Association's conference, Mr. Shiller said he expects stocks to gain a mere 2% to 3% annually over the next decade.

In his presentation, Mr. Shiller, well-known for his S&P/Case-Shiller Home Price indexes, illustrated how farmland participated in the real estate bubble from 2000 to 2005, but did not fall as much over the past few years.

“My only bullish call is farmland,” he said.

The reason farmland has held much of the gains that it built up during the real estate bubble, he said, is that, unlike housing, there is a limited supply.

“A single, logical error that people make when buying a home is that they think buying a home is the same as buying land,” he said. “But in the total price of a house, only 20% is the land.”

Mr. Shiller also covered some of the driving forces behind the financial crisis, which he described as the worst since the 1930s.

“Even at this point, with the recession technically over, we are in the worst financial shape we've been in since the Great Depression,” he said.

Mr. Shiller mentioned the usual suspects in explaining the 2007-09 crisis, including relaxed lending practices, a disproportionate percentage of subprime loans, weak regulatory oversight and a government policy that encouraged more mortgage lending.

But the real question people should be asking, he said, is why we ended up in that position in the first place.

“You can't just blame the regulators, because people weren't calling for regulators to do something about it during the housing boom,” he said.

In terms of his generally gloomy investment outlook, Mr. Shiller calculated the real unemployment rate — including the unemployed and underemployed, as well as those people that have been forced into early retirement — at 15.9% — about one-sixth of the adult population in the United States.

The downward trend of the latest consumer confidence data also should be recognized, he added.

“It worries me because if people don't have confidence, they don't spend money,” he said.

Mr. Shiller also pointed out that the homebuilding industry, and probably the banking industry, actually started feeling the pressure at least two years before the start of the financial crisis in 2007.

According to his research, consumer traffic at real estate properties started to fall dramatically in 2005, and that was followed by a dramatic decline in housing permits.

“It was almost like somebody blew a whistle that only dogs and homebuyers could hear,” he said.

E-mail Jeff Benjamin at jbenjamin@investmentnews.com.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

INTV

Former CIA director John Brennan on the importance of contingency planning for financial advisers

Speaking from the floor of the MarketCounsel Summit in Miami, the ex-CIA director makes a strong case for why financial advisers need to have a plan for managing through a disaster.

Video Spotlight

Help Clients Be Prepared, Not Surprised

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

Brace for steepest rate hikes since 2006 in new year

Citigroup, JPMorgan Chase predict average interest rates across advanced economies will climb to at least 1 percent in 2018.

Why private equity wants a piece of the RIA market

Several factors, including consolidation in the independent advice industry and PE's own growing mountain of cash, are fueling the zeal to invest.

Finra bars former UBS rep for private securities transactions

Regulator says Kenneth Tyrrell engaged in undisclosed trades worth $13 million.

Morgan Stanley fires former Congressman Harold Ford for misconduct

Allegations against the wirehouse's former managing director include sexual harassment, which Ford denies.

Senate tax bill changes for pass-throughs more generous than House version, experts say

Senate measure's handling of such small-business income is simpler and makes allowances for more service companies.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print