Today's Dream House May Not Be Tomorrow's (New York Times)

New York Times
(4/27/2013 2:06 AM, Robert J. Shiller)

HOUSES are just buildings, but homes are often beautiful dreams. Unfortunately, as millions of people have learned in the housing crisis, those dreams don't always comport with reality.

Economic and demographic changes may severely impair the value of a home when it's time to sell, a decade or more in the future. Will a particular home still be fashionable then? Will social and economic shifts tilt demand toward new designs and types of communities —even toward renting rather than an outright purchase? Any of these factors could affect home prices substantially.

An ever-changing economy requires constant geographical repositioning. In the 19th century, for example, housing was often built near factories and warehouses, with apartments or houses containing numerous small rooms intended to accommodate many people per structure. In those days, before air-conditioning, these buildings often had large porches for access to cooling breezes.

Early in the 20th century, many houses were built around streetcar routes. Then, when the Interstate Highway System started in the 1950s, suburbs bloomed along the path of superhighways. With cheaper cars and relatively cheap gasoline (despite spikes in the 1970s and after 2005), housing developments became more dispersed. A culture that prized privacy and individuality left many neighborhoods without sidewalks or nearby community gathering places. Houses were cheaper to build this way, and they grew larger.

In the last century, shifts like these helped explain why inflation-corrected prices for existing homes typically changed by plus or minus 15 percent in a decade, even without national bubbles.

Further changes are inevitable, but hard to predict. For example, governments may now be reluctant to spend much on infrastructure like new highways or high-speed rail. But what will happen in 10 years — and what are the possible effects for the housing market?

We live in what's been called an ideas economy, with a shrinking industrial base and a greater premium on knowledge and personal connections, which make social, educational and business networking ever more important. New social media haven't reduced the importance of geographical neighborhoods.

In his 2009 book, "The Great Reset: How New Ways of Living and Working Drive Post-Crash Prosperity," Richard Florida argues that the modern economy requires a different layout: "The coming decades will likely see more intense clustering of jobs, innovation and productivity in a smaller number of bigger cities and city-regions," he writes. That outcome would certainly affect prices of existing homes. It seems a plausible direction for housing development, but it's certainly not guaranteed.

AT the moment, walkable urban areas — pleasant places where people can stroll to work and to restaurants — are becoming more popular. Last year, a Brookings Institution study of the Washington area by Christopher B. Leinberger and Mariela Alfonzo concluded that such neighborhoods, where creative people cluster, show the highest property values. Far-flung suburbs are losing value relative to cities and close-in suburbs that offer such walkable areas. And these denser places seem to fit in better with more environmentally conscious values, too.

Attitudes toward renting have also been changing. A MacArthur Foundation survey, conducted by Hart Research Associates in February and March, asked Americans if they thought that, "given our nation's current situation," buying a home had become more or less appealing. Fifty-seven percent said it had become less so, with only 27 percent saying it had become more appealing. When asked if they agreed with the statement, "For the most part, renters can be just as successful as owners at achieving the American dream," some 61 percent agreed; 28 percent did not.

Perhaps that trend will continue. Renting, which connotes mobility, might come to be identified with a high-status lifestyle in the new economy. If renting does become more important, owners of existing housing will be affected unevenly. A 2011 study from the Department of Housing and Urban Development concluded that conversion from ownership to rental properties has often been difficult: It has been more common for some townhouses and other "attached" homes that are relatively small and old and located in central cities. Much of the owner-occupied housing stock of today doesn't fit that bill.

There is another problem. It's not just that many houses today don't convert easily to rental property. In addition, they haven't been designed to foster their use as components of continuing-care retirement communities. Yet, as baby boomers retire, the demand for such places will probably grow at the expense of conventional housing.

In the wake of the housing crisis, and amid shifting demographics, it's plausible that a broad change in thinking is ahead, reducing demand for large suburban homes. After all, the national psyche has absorbed the tribulations of the millions of people who have been living in homes worth less than their mortgages, struggling to make payments and yet unable to sell. Smaller living quarters may become more socially acceptable.

This future for housing is possible, but we don't really know. The housing haze is very thick, and, as I've said in other columns, so many things affect home prices that it is hard to foresee prices for a particular home years from now.

Forecasting is indeed risky, because of factors like construction productivity, inflation, and the growth and bursting of speculative bubbles in both home prices and long-term interest rates. The outlook is so ambiguous that there is no single answer to the question of housing's potential as a long-term investment.

If you want to settle down for a quiet life and watch your children grow up in a nice neighborhood, you might well act now to lock in an ultralow mortgage rate. Then again, if you're restless, ambitious and determined to be mobile, it might be sensible to rent rather than own. Calculating the best economic return may not even be possible, given the uncertain investment potential.

Instead, it may be wisest to choose the housing that best meets your personal needs, among the choices you can afford.