Bob Toll, Executive Chairman of Toll Brothers, recently told Reuters that home prices are going to jump 20% in 2013 and another 25-30% in 2014.
But before you decide to pile into real estate, you might want to think about it for a moment.
It's not that there's anything wrong with Mr. Toll, nor even his prediction. He is a seasoned executive in one of the most respected homebuilders in the country; it's why he made this prognostication and what he stands to gain from it that bothers me:
- Toll Brothers (NYSE: TOL) is one of the most prominent and capable homebuilders in the country. If people believe that real estate will appreciate, they are more likely to buy more of Bob Toll's product.
- Toll Brothers needs more of the same – big bailouts, big stimulus and low interest rates because that greases the skids in the banking system for big real estate companies like his. Without the extra money floating around, Toll Brothers' financing options are limited and he can't build or at least build as much. Worse, if interest rates rise, his cost of capital will increase significantly and negatively impact his margins. Rising property values give companies like Toll Brothers greater collateral and borrowing power, so of course he wants properties to appreciate…a lot.
- Toll is also an outside advisor to President Obama. That means he's plugged into the White House like other big business leaders and has a vested interest in preserving the status quo rather than shaking up the establishment and really fixing things.
As for the notion that real estate will appreciate 20% next year and as much as 30% the year after, that's a more nuanced insight. Note, I'm not saying it's impossible, just that it's highly unlikely on anything other than an extremely localized basis.
Why Bob Toll is Wrong About Home Prices
When viewed against the longer term lens of history, housing values are still as much as 6-12% overvalued.
You can see that quite clearly in the Case-Shiller Index created by Yale's Robert Shiller. Take a look: