Surowiecki Strikes Again: Why Median Home Prices Don’t Tell The Whole Story

Contrarian super-brain James Surowiecki, author of the Wisdom of Crowds and a weekly New Yorker column on the economy, wrote last Thursday about how why the conventional wisdom that real estate prices never actually go down is wrong.

His argument is that the median housing prices on which newspapers report don’t take into account:
–> inflation (already noted by the NYT) (inflation adjusted prices dropped eight percent between 1979 and 1991);
–> the incentives builders offer home-buyers, which are effectively discounts;
–> that new houses get bigger and nicer every year.
Surowiecki cites Yale economist Robert Schiller who created an index of hundred year-old houses and how their prices have changed over the century, sometimes going down, sometimes going up. This provides a more accurate and sobering portrait of the real estate market.

Surowiecki ends his column by noting that that you can sleep in a house but not in other other investments, like a stock. This points up a few other criteria to consider when trying to decide whether to buy a house:
–> The commissions on houses, which are higher than on stocks;
–> Taxes and repair costs and, on the positive side,
–> The benefit of government-sponsored mortgages (most people can’t buy stocks on margin the way they can buy houses via a mortgage, and the interest on mortgages is tax-deductible).
–>What you’d have to pay in rent if you didn’t own a house.

The article is a delight to read, mostly because Surowiecki is such a good writer — effortlessly popularizing big, complicated ideas every week. I’ve spent the past few years concocting schemes to meet Surowiecki so we could pitch a few STUPENDOUS ideas for his column.

The most recent effort was on a blustery evening last winter when I walked into the lobby of the Conde Nast building, claiming I had an appointment. The security guards had already noticed me trundling around Times Square for half an hour with a wheelie and briefcase in tow, trying to get the guts to lie to their faces.

They asked me to stand to one side while they made call after call, each more dubious than the last. After five minutes I said, “Forget about it.” They insisted. Other people, respectable people, in suits much better than My Good Suit, were being whisked inside. No city makes you feel like a hick — or when you are trying not to be a hick, like an impostor — like New York.

Then finally a security guard put the phone down and announced that “Mr. Surowiecki doesn’t even work in this building.” An army of comforting thoughts and rationalizations was at that moment routed and took full flight. Ten minutes later, on the subway headed for the airport, it was a relief to be surrounded by people who didn’t despise me.

The sad part is that I had been in the hallowed halls of the New Yorker before, attending a workshop. On the elevator ride down, I met a Conde Nast employee and asked the only question that came to mind: “How’s the food here?” “Gourmet & Bon Appetit are in this building too,” he said, then paused. “It’s awesome.” I wanted to ask if he meant the food in particular, or just everything, but already knew.