Air Date: Week of July 21, 2006

With insurance premiums going through the roof in many seaside locations, homebuyers looking for oceanfront property may be in for a risky investment. Host Steve Curwood talks with Yale economics professor Robert Shiller about the current climate of coastal real estate.

Transcript

CURWOOD: So, how does all the turbulence of the coastal home insurance market affect the price of real estate in these areas? To get a perspective, we put in a call to Robert Shiller. He’s a professor of economics at Yale University and has written extensively on real estate in speculative markets. Hello Sir.

SHILLER: Hi.

CURWOOD: We understand that people are having trouble buying and selling insurance for hurricanes. How does that affect the real estate market for coastal areas?

SHILLER: In principle, we know that insurance rates have been rising rapidly. The cost of insurance in the South has been a problem. It has been going up rapidly. It’s partly the insurance companies want more. And it’s partly because of the hurricane risk, which seems to be going up. And in many places in the South it’s also because damage claims for mold have been going up. So, in principle, that might be the way that increased risk hits home prices. Because people will see how much they have to pay for insurance on this home and then that will give them second thoughts about paying such a high price on the home. But that, you know it hasn’t really hit yet. But maybe the impact is delayed. I think that we have been going through such a psychological boom around glamour areas – and often coastal areas are glamour areas – around the country, that it’s been carrying prices up.

It’s been a rather sudden change. If you look at some of the data that’s been collected about the percentage of homes that are second homes, it’s gone up rapidly in the last few years. So that people are buying something like a third of all homes are either investment homes or vacation homes.

CURWOOD: Is there any evidence that climate change is affecting the climate of real estate?

SHILLER: Well, it’s a question of how much. It seems to me that homes on the shore are not necessarily good long-term investments. If global warming proceeds and the sea level rises and storms get worse, that’s another factor working in the other direction. I want you to view these as a risky investment. I would think that what’s coming up is we’ll see more and more opportunities to hedge the risk anyway. So, we just started a future’s market at the Chicago Mercantile Exchange where you can short the Miami home market now. And I think that people who want to live in the Miami area can buy a house there and then hedge their risk. And this is what’s coming I think more and more in the future.

CURWOOD: So wait a second. I buy a house for a million bucks and then I go to the Chicago Mercantile Exchange and I get a hedge, I pay a price for somebody who would give me that million dollars if the price were to drop.

SHILLER: Effectively, yeah. You’d be selling a future’s contract. Or you could buy a put option. I know this sounds esoteric. Not many people are doing this yet. This is just starting out. But I think that in the future it will become important.

CURWOOD: Hmm. Are you buying any coastal real estate?

SHILLER: I have a home on Long Island Sound, yeah. It’s a second home. I bought it four years ago.

CURWOOD: Yeah?

SHILLER: I don’t know if I’d buy it today.

CURWOOD: Why not? Why wouldn’t you maybe buy it today?

SHILLER: Well, looking here in Connecticut along the shore, I see an awful lot of for sale signs up on these properties. And it mirrors what we see nationally. That the inventory of unsold homes is soaring. Now I don’t have data on coastal areas, but it looks to me like it’s even more intense along the coast. So, when this happens it’s not a good time to buy unless you can get a really good price.

CURWOOD: Where do you think, if there was to be a tipping point in the market, the coastal market, where do you think it might tip first?

SCHILLER: Well, I worry about price drops in real estate. We have seen an enormous rise, you know, doubling or even tripling in many areas. And some of these coastal areas are the most extreme. Cape Cod, Nantucket, they’ve gotten so high on those Nantucket and Martha’s Vineyard. If you look at a nice house in town, not even on the water, you could pay five million dollars for it. If we see a weakening of the market, they could be an early show of decline. But there are a lot of differences in price that I think are due to public attention and public sense of glamour that in the long run may not be so sustainable.

CURWOOD: Robert Shiller is professor of economics at Yale University. He’s author of the book Irrational Exuberance, an Analysis of Real Estate, Stock Market, and other speculative bubbles. Professor, thanks for speaking with me today.

SHILLER: It was a pleasure.

 

Links

Princeton University Press link to “Irrational Exuberance” by Robert Shiller

National Association of Realtors