Peter G. Miller
OurBroker®

Oh no, the sky is falling -- or at least realty prices are destined to fall over the next 25 years if we are to believe an assortment of economic seers and soothsayers.

Worth magazine, discusses such forecasts in its newest issue ("Will the Roof Cave In?" February, 1999), forecasts which essentially suggest that realty prices will drop as the population ages and the housing supply increases.

There is considerable logic and reason to support such a view, but before selling your realty portfolio and moving into a tent let us consider that economic forecasting is something less than an exact science.

For example, two of the world's leading economists -- Nobel prize winners in 1997 -- recently had their predictive skills tested in the marketplace. The result was a discomforting rumble across the financial world from a hedge fund known as Long-Term Capital Management.

Economics is often called the "dismal science," a description which is at least half right. Economics is not a "science" in the sense of biology or physics, rather it is an effort to better understand such issues as pricing, spending, financial behavior, inflation, deflation, employment, commodity pricing, wealth, and a host of related issues. Policy decisions and investment choices are often made on the basis of economic forecasts, decisions which hopefully have more validity than a coin toss.

Unfortunately, the history of economics is studded with colossal mistakes. Karl Marx suggested that an ideal economic system would allocate goods and services "from each according to his abilities, to each according to his needs." The Soviet Union followed this logic for 75 years and the result was lengthy waits for housing, telephones, cars, and food.

For many years I have joked that three groups predict the future: fortune tellers, astrologers, and economists -- and that all are equally accurate. The point is not that economists are always wrong, but rather that tomorrow's events may not conform to neat and tidy mathematical models. There are always "special cases," situations not anticipated by the models and -- alas -- there is a good argument to be made that all of life is a "special case."

In looking at tomorrow's housing picture, it surely makes sense to suggest that the demand for homes rises and falls with the buyer population, and that less demand and a larger housing stock might produce lower prices after correcting for inflation.

Then again, maybe not.

Think about 1975. According to the National Association of Home Builders, a typical new home had an average of 1,645 square feet. That same year, the Census Bureau reports that a typical household included 2.94 people.

In 1975 we could expect to allocate 559.52 square feet of new home space for each household member in a country where a majority of the population lived well relative to virtually all other nations.

Logically, if household sizes decline does it not follow that home sizes should also decline?

In 1997 we had 2.64 people in a typical household and new homes had an average of 2,150 square feet. The average amount of space per household member reached 814.39 square feet in 1997 -- a 45.5 percent increase over 1975.

The "Worth" article properly points out that local factors may influence future home values, and that interest rates and tax policies will also play a role in how homes are valued.

But what about personal preferences? Maybe more and more people will want two houses. What about household size? Perhaps larger families will become more common.

The list could go on, but the basic point is this: Future events are unknown and unknowable. That's why there's a marketplace, why equally-qualified economists (and soothsayers) arrive at different conclusions, and why if we knew the future there would be no risk.

Question Of The Week

Q Is the assessed value of my home equal to its current market value?

A Not likely.

Assessments are valuations made by government agencies to value local property. Property taxes are then calculated on the basis of assessments.

However, assessments are not made continually -- they are made every two to three years in many jurisdictions and thus are not current. Moreover, "assessed" values and market values may differ -- assessed value increases may be limited by regulation, homeowner status (a break for those over 65, for example), and other factors.

For details, speak with local Realtors® about property assessments in your community.

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Published: January 20, 1999

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Editor's Note: This article reflects the opinions of Peter Miller only and not necessarily the views of this or any other publication, organization or Website owner.