How different are cows from houses? On the calculative deficit of real-estate microspeculation

October 26, 2008

Humor sometimes contains serious theory. Yuval’s wonderful post on the fictional Icelandic cow farmer (originally written in The Guardian) offers some fine British irony at the expense of Icelanders. The post describes a befuddled Icelandic farmer making sense of the real estate bubble. Being a farmer, he talks about houses in terms more familiar to him — as cows. Put in these terms, a paper-rich homeowner seems as preposterous as a paper-rich cow-owner.

On a more theoretical front, the story brings up one core lesson from the housing bubble. Real estate has suffered from a problem of “regimes of worth,” following the terminology of my coauthor David Stark. As. Bordieu wrote, houses have always been an ambiguous asset, purchased for consumption as much as for investment. In the non-calculative approach to houses… they were more like “homes,” part of what Boltanksi would call the “domestic sphere,” and purchased at concrete milestones in life: before marriage, after divorce, as bequest to children, etc. In recent years, however, houses became more of investment vehicle, part of the market regime, bought and sold for capital gain. They always were both consumption and investment, but it’s fair to say that their investment aspect took precedence with the appreciation in prices.

If investment was the only real-estate game, what we now know is that investors did not have the tools to play that game. Specifically, it seems that the only criterion used by retail home buyers was the time series of past house prices. Going by the chart –a steep upward-sloping curve– all houses seemed just about ready to appreciate by ten percent in next year. Lacking an alternative valuation device, retail home buyers were turned into pure relativists. As microspeculators, home owners were like the day traders of the dot-com bubble; their speciality was to see where other investors were going. No more sophisticated, in other words, than rich cow farmers.

Of course, it is now easy (and insensitive) to play monday-morning quarterback and poke fun at the losses of others. But my point is a different one: to highlight the calculative imbalance between the speculative and other approaches to real estate. What tools existed out there for the value investor? What tools for the skeptic? What tools for the home buyer who did not want to bet on the house market?

The point is not just purely theoretical. Back in 2006, as I came to New York, the only investment advice I obtained from my academic colleagues was “buy a house.” Aware of the elevated prices, I sought ways to hedge my exposure to the market. How easy would it be to bet against house prices to protect myself from a crash in real-estate? This was indeed Rober Shiller’s vision when he founded Macro Markets. Curious, I asked a colleague in finance, and the advice I got was a different one: as an individual, keep it simple, stay out of derivatives. Wait a year, see what the market does. I waited, and watched the market drop. And became thankful to my finance colleague.

The point of the story is that there is an asymmetry in the tools available to the retail investor in real estate. , This may have been one of many causes for the bubble. In the controversy over the value of a house, new calculative tools only fed the optimistic side of the debate.

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