Well, I don’t think it will be different this time if you use the correct valuation methods. SD housing may be 100% overvalued on a price/income basis, but this is a very rough metric that doesn’t take into account long-term interest rates and rents. If long-term interest rates go back to where they were in the 80s, then yes, price/income ratios will go back to that “historical” average, which would be a 50% haircut from present values. But if long-term interest rates stay pretty much where they are, we’ll see a much smaller drop.
Let’s just say that nobody can predict long-term rates, so making either assumption is dangerous.
A better metric is the ratio of present value of future homeowner costs to rents. This shows (I’ll try to put together a plot later) that SD housing is well above trend, but not by 100%. Maybe by 30-40% (the result depends on what rent inflation you forecast), which means that house prices need “only” drop about 25% to get back to tre trend line. They may of course overshoot, but that’s another story.
So my argument is that SD housing prices will revert to the mean, as the bears correctly say. But some of them are just looking at the wrong mean.
