Location: You’ve been warning of a national real estate collapse since 2005. Do you feel vindicated by last year’s downturn?
Mr. Shiller: Well, I don’t like to use the word vindicated, but it is unraveling as more or less I expected.
When your S&P/Case-Shiller index of home prices came out last year showing record drops, you said things hadn’t been this bad nationally since the Second World War. Yet the sub-prime mortgage scandal hasn’t much affected Manhattan. Are we immune?
Firstly, you’re definitely not immune, OK? Manhattan is a unique place, and that does mean that it has different dynamics, but it’s not immune, I can guarantee you that … If it gets too expensive in New York, people will leave it, no matter what—they can’t afford to live there. And so it’s just not true that New York will keep appreciating independently of everywhere else, I just don’t believe it. Elementary economics say people will always substitute away when the price gets too high, and so they’re doing that.
What will the bursting of the real estate bubble in New York look and feel like?
It will probably start showing synchrony with the rest of the country, and it will happen very gradually, it will start slowing down. If we’re going into a recession, it won’t be that exceptional, people won’t be that surprised.
Our real estate boom since the 90’s is unrivaled, you’ve said, even by the post-war baby boom. So would it be normal, even desirable, for it to end?
It would be a great thing for New York if prices came down, because more interesting people would move in. Your artists can’t afford to live there anymore … They’ll move out of Brooklyn, they won’t be anywhere nearby.
You’ve suggested the Internet boom was ‘a silly, in fact embarrassing fad.’ But will the New York City real estate obsession ever die?
Did you know that the world financial center [of the 1600’s], Amsterdam, created a second city called New Amsterdam? And it’s the world financial center today. Amsterdam hasn’t gone up! It’s the satellite city, called New York now, that’s replaced it … New York will set up satellites; we’re starting to do that with Greenwich and Stamford and I don’t know where else, and it doesn’t have to stay there. The idea that it’s just going to keep going up, especially with the Internet age, which makes communications more easy, I just don’t think it’s reasonable to think it’s just going to keep getting more and more expensive.
So we’ll be replaced?
That’s right. People like urban living, I think we’ll see a movement toward building more urban centers. Manhattan is a symbol for a kind of living that people find very attractive … [Scholars] are arguing that zoning has to be rethought. We have to create new Manhattans, there’s a demand for them. It’s too expensive in Manhattan, there’s no reason why we can’t have a brand-new one somewhere. We just have to build it, plan it all out, a planned city, put it somewhere where land is really cheap, on the coast somewhere with a good location.
A New Yorker wouldn’t believe the city would be replaced! ‘Boom psychology’ is the egoism that investors get during good times. When that dissipates, it’s bad for the economy. So can New York’s cockiness be a good thing?
No, I don’t think it’s a good thing. I think it has encouraged people to push prices up too high, and that creates all kinds of distortions. Unfortunately people have trouble maintaining an even keel; we go through waves of optimism and then maybe excessive pessimism.
If New York’s unique, even among the so-called superstar cities, what’s our kryptonite? What could potentially bring us down?
I was just in Charlotte, North Carolina, at the Bank of America headquarters, and they moved their headquarters from San Francisco. Why did they do that? Because it got so awfully expensive in San Francisco. Of course San Francisco is another superstar city. I asked people [who relocated to Charlotte], ‘Do you regret it?’ What do you think they said? They said ‘No, I have a two-acre lot, and I have a horse, and we just love it here’ … There’s always going to be something unique about New York, but you know sometimes these unique places are surprisingly not expensive.
I’m 23 and making under $30,000, and so of course I hate the expensiveness of this city. And yet I think you’re underestimating New York.
It’s a little bit like Rome. I don’t know if you’ve ever read what Roman historians say: People in that city, I’m talking about ancient Rome, there were poets who extolled it, it must have been an amazing place. I wish I could go back in a time machine, it must have been something! The Roman Empire centralized on Rome more than the U.S. does on New York; in fact their whole country was named after Rome … They definitely had great feeling for that city, and it’s still there, and it’s still a neat city. But it went through some bad periods, if you look at history: Really bad periods when it fell into decay! So it’s kind of up and down, and I think that’s the typical history of cities. Rome has not always been expensive.
What’s the psychological factor to a real estate bubble?
The human species is very empathetic; they connect with each other … We get the excitement—you get a sense of excitement of a boom. I was in Silicon Valley in the late 90’s, and I was at the hotel breakfast, listening to people at the tables, they were hatching these excited businesses, all sitting on the edge of their seats. There was a sense of euphoria, and it does infect everyone else.