Financial Markets: Lecture 12 Transcript
February 22, 2008
Professor Robert Shiller:
I want to start out by talking about real estate as an asset class. It's actually the
biggest and most important asset class. The value of real estate in the United States today is--of real estate
owned by households directly--is about twenty trillion dollars, which makes it comparable or maybe a little
bit bigger than the stock market. Stocks owned directly by households are only about six trillion dollars. For
a typical household, the home is the major source of wealth that they've accumulated. Of course, other stocks
are held by institutions on their behalf, but in terms of direct ownership, homes are the main thing that people
own. There's also commercial real estate, which is smaller than owner-occupied homes, but we own that
indirectly too, as a people, through the stocks that we own and through the institutions we participate in. It's
very important and it has some important financial–there are a lot of financial institutions built around
dealing with the fundamental problems of real estate.
I want to talk first about institutions and then move to what I think is, myself, more interesting, which is the
real estate boom and the kind of fluctuations we've seen in real estate over the years. I'm going to start out by
talking about commercial real estate and the kind of vehicles that we use to invest in commercial real estate.
Then I want to talk about mortgages, which is the way that we finance both commercial and owner-occupied
real estate. Then finally, I want to come to the real estate boom that we are recently in.
Let me start by--the way--the kind of institution that you probably know relatively little about--or
commercial real estate. Commercial real estate--that means real estate owned not by individual households
but by businesses. The institution I wanted to talk to you about first is called a DPP, a Direct Participation
Program, which has been traditionally the single most important form of holding of commercial real estate.
When you drive along and you see all these commercial buildings, you might wonder who owns them. Well,
sometimes they're owned by corporations, but I think the more important institution is the DPP, which is a
financial vehicle that owns commercial real estate on behalf of investors. The most important DPP is called a
limited partnership or LP. There's a very simple reason why real estate tends to be held in limited
partnerships rather than corporations and that reason is the corporate profits tax.
Corporations are taxed on their profits and DPPs are not. You want, if you are setting up an organization to
hold real estate, you want to do it, if you can, as a DPP because you don't want to pay those taxes. Whenever
possible, an ownership vehicle for commercial real estate will have the form of a DPP. A limited partnership
is one kind of DPP and it has--it's not a corporation, so it's a partnership. The simplest kind of partnership