So commercial real estate. Real estate partnership is an example of a direct participation program. In order to buy in to a real estate partnership you have to be an accredited investor, which is defined by the Securities and Exchange Commission in Washington D.C. as in terms of your wealth and your income. Now it used to be you had to have more than $1 million of investable wealth in your name, excluding your house. Or an income of $200,000 a year or more. How many of you are accredited investors? I won't ask for a show of hands. [LAUGH] You might have to achieve a certain age too, to be an accredited investor. But the idea is, we will protect the small investors against fraud and being cheated because they don't have lawyers and can't afford lawyers and advisers and they are so vulnerable. But if you're rich, the government says all right, you have your advisers. Will they let you invest more generally? Other countries have similar divisions. So it's not just the US. That makes sense, right? You have to protect ignorant people. Not everyone is smart. We can't let the crazy schemes prey on them. Okay, so a real estate partnership is for accredited investors and a limited partnership means you have limited liabilities. At least the limited partners have limited liability. Direct participation or flow through vehicles, they escape corporate profits tax. But their profits become your income. The IRS has various requirements. One of them is that a DPP can't be perpetual. It has to have a limited life. Corporations derive a lot of their value from the fact that they go on forever. Once a company establishes a reputation, it has value that will last maybe hundreds of years. Or if not that long, at least many decades. But a DPP is supposed to be for a particular life. That means, for example, you would buy an apartment building, a typical DPP. You'd get a small number of partners, rich people who buy into your partnership. And then you say that in 20 years we'll sell the building, and then we close down. So you've satisfied the IRS requirements for a pass-through vehicle, and you don't have to take corporate profits tax which is a big advantage. The general partner runs the business and does not have limited liability. Must own at least 1%. Limited partners are passive investors, just rich people typically, and they can replace the general partner. And they sell units to investors and give performance based compensation to the general partner who's taking the risks. Now there were complaints about these limited, they were trying to protect small investors. But, when that left small investors unable to invest in real estate. In 1960, the US Congress created something called a REIT, Real Estate Investment Trust. And I believe the US was the first country. But I shouldn't say that I know that. There's so many things that happen. Often, the US is not the first to do something but it becomes a leader in finance, a leader toward a movement, so something will happen. But it was new, definitely in the US, in 1960. So the complaint was, I, a little guy, just can't invest in all of these buildings that have been making so much money for rich people. It's unfair. So, the US government created a new kind of investment vehicle called a REIT, that would be available to small investors, and they'd be regulated to be safe. But it wouldn't necessarily be safe, because you're investing in a real estate, and if a real estate goes bad. But at least they won't be taken advantage of. And they also get the tax break. You could have set up a corporation before this that owned real estate, but they would be paying corporate profit tax. Now REITs are getting much bigger. They've been over a half a century now, and they're now in many countries. But US is still the biggest source of REITs. So the law restricts REITs. So they're not going to pay the corporate profits tax, so they don't want to let corporations call themself a REIT. A company could say, wow, we own real estate, we own the factory and so we're a REIT. No way, you can't call yourself a REIT to escape taxes. So they had to define it. So they defined it that 75% of the assets must be in real estate or cash. And 75% of the income must come from real estate. And 90% of their income must be from real estate dividend, interest and capital gains, and 95% has to be paid out. Now here's where the dividend earnings ratio is set by law. They've gotta pay out their earnings. And also, they wanted to discourage, No more than 30% of the income from sale of properties held for less than four years. They wanted it to be long-term investing, not turning over rapidly. So starting in 1960, there was a REIT boom, and that was followed by a recession and a drop in property prices into the early 70s. There was a second boom after the tax reform of 1986, eliminated many of the advantages of partnerships. It used to be that DPPs could do fancy arithmetic on their taxes that you got, which would make them very advantageous, notably you could depreciate by favorable rules that reduced your taxes even if the depreciation wasn't real. So they made it less profitable in 1986 to invest in a DPP. And then there was a third boom starting in 1992 when many companies, after, there's also a time when a lot of specialized REITs developed to appeal to investor interest. So you can buy a golf course REIT. Remember, real estate is about structures and property, so golf courses apparently satisfied the idea of investing in property, and you can do a golf course REIT. Or many different kinds or REITs. >> You describe how human psychology explains a lot of the price movements in housing, in real estate. >> Mm-hm. >> But if we don't consider those, if we absent any psychological factors, what would the long term housing price index look like? >> Okay. I never actually went through that exercise. If you look in my book I have a plot of home prices since 1890, and construction cost since 1890. So maybe it would look more like construction costs. So remarkably, if you correct for CPI inflation, construction costs haven't gone up a lot in 100 years. In fact, for the last few decades they've been sagging. Why is that? Well, I think it's because there's technical progress. We mass produce things now. They used to plaster by hand on now they put drywall up. It's cheaper and quicker. Things are pre-made, you just stick them in place, mass produced. So, that limits the rate of growth of construction costs. And I think prices, if that were the only factor then prices would look like construction costs. That's what people often have said, economists have often said that prices are just driven by construction costs. But those economists wrote before the recent bubble in home prices. [COUGH] They're getting more, they're more psychological. There's more attention, the psychology of the housing market has changed. If you went back to the 19th century, it's hard to find many real estate bubbles that [COUGH] you do find them. For example, in the 19th century in Manhattan and Los Angeles, and few other places as well. But what did Manhattan and Los Angeles have in common? They were glamorous places. They were glamorous back then. Beautiful weather in Los Angeles, and also a shortage of space to build, at least especially in Manhattan. So in those places they had housing bubbles, but not everywhere. So something happened in the late 20th century that got people, and not just in the US in many places, got many people thinking that real estate was really going to be scarce. I think it had something to do with the free market revolution that started in Britain with Margaret Thatcher and in the United States with Ronald Reagan, and then in China with Dung Chow Ping. There was a move over much of the world towards free market, which I think on the whole was a good thing. But, it also had its consequences. It led people to think, we used to be a society where we appreciated the working men or women, and we would protect them. Now everyone's gotta watch out for themselves, and they started to have a fear that housing would just get beyond affordability. And that kind of is still with us, that the home prices are just going to go way up and you better buy now. Now you don't see that so much in that, I looked through old newspapers for ideas like that. Maybe in Manhattan, if you want a house in Manhattan. I remember reading from the 1880s someone saying, it's hard to find a building that's less than six stories tall that's going up now? [LAUGH] You can't just buy a house in Manhattan anymore, and it's still true, and it's still expensive there.