"I have just returned from a visit to the Interdisciplinary Center in Herzliya, Israel, a country where house prices are high. I asked some of my hosts why houses are so expensive in Israel, and they gave me the same answer I have gotten when I have asked the same question in India–that because many people do not trust the stock market, they have no place to invest their money other than the real estate market.
This reminds me of a conversation I had while getting my hair cut back when I was a graduate student. The barber was telling me how he owned a small apartment building in Florida, and how it would be the source of his retirement income. I told him that he really needed a more diversified strategy–that he should take the equity in his building and invest it in a low-load index mutual fund (Given that I said this in the 1980s, it would have turned out to be very good advice). After hearing my thought, I think my barber considered cutting my ear off (no, not really). He said he didn’t trust anyone on Wall Street, whereas he could touch his building, and know his tenants, and that gave him great comfort.
And so one can’t help but wonder whether it is a lack of trust in equities (that arises from a lack of trust in Wall Street more broadly) that leads people to continue to want to own housing in the US, even though a recent study by Patrick Bayer, Fernando Ferreira and Stephen L. Ross has shown it to be a particularly poor investment for the most financially vulnerable among us."