Learning from history is great, and I love the historical perspective. Based on historical ratios of home prices to income, San Diego and LA and many other places seem overvalued. (I think the prices are ridiculous, myself.)
However, housing history isn’t restricted to California or even this country. My impression is that home prices in the UK, for example, are an even higher multiple of incomes than here the US. And the financial sector and economy there has adapted to this. Perhaps someone more knowledgeable than I can fill in the facts (price/income).
Here’s another challenge for someone who knows where to get data or credible studies: Did the ratio of US home prices to income permanently increase after the advent of government guarantees for mortgages (Fannie, Freddie, FHA…)? Will all the looseness in home loan underwriting of the last few years simply disappear completely, or is some of that also a permanent change?
Where is the Chinese central bank going to invest next month’s trade surplus dollars? Wherever that is, it will continue to depress all asset returns for the many yield-hungry US pension funds and other institutions who have to invest their next month’s cash flows also. Much ingenuity will be expended on creating reformed ‘solutions’ that cause home loans to still look like they yield more than Treasuries. And those funds still need those higher yields.
So the pressures on credit and therefore home prices are there and having some impact, but we still don’t have other factors kicking in, like a recession, or liquidity drying up, or a sharp collapse in the dollar, or high CPI numbers, or the Fed being tight, or a nuclear terrorist attack, or… If one or more of these happen, then the probability of a really major dip in home prices, back to historical averages, becomes high. Until then, we’re all just hoping and speculating (which is fun) while watching the emerging facts on the ground.
