If you own a home or were thinking of buying one, this analysis from the Economist is worth a read. Not because you should sell and move into the Y; but because, if the Economist is right, you may not want to live in more house than you can afford.
And because the economy as a whole would be affected – which is one reason the Fed will struggle to prove the Economist wrong. How that struggle will turn out . . . well that’s what makes investing interesting, I guess.
The most striking paragraphs:
Calculations by The Economist suggest that house prices have hit record levels in relation to incomes in America, Australia, Britain, France, Ireland, the Netherlands, New Zealand and Spain. In other words, ratios of prices to incomes are now above levels that have proved unsustainable in the past. Taking the average ratio of house prices to incomes in 1975-2000 as a baseline, American house prices are now almost 30% overvalued.
Japan provides a nasty warning of what can happen when bubbles burst. Japanese property prices have dropped for 13 consecutive years, by a total of 35% from their peak in 1991 (see chart). Yet the 36% rise in real house prices in Japan in the seven years to 1991 was actually less than the increase over the past seven years in all but one of the eight countries listed above where prices appear overvalued.
There are plenty of symptoms of a bubble mentality in the United States, not least the surge in the turnover of existing homes to a record rate of 9% this year. Investors have been buying new properties and reselling within a year in the hope of a large gain. Economists at Goldman Sachs are concerned about signs of excess supply. The rate of growth in the housing stock exceeds the rate of growth in the number of households by a bigger margin than at any time in the past 40 years.
It’s worth reading the whole thing.
And while I have you hating me, I may as well link you to this, on the Ohio recount.
Have a nice day.
Quote of the Day
In 1800, 75% of [an American's] working man's expenditures went for food alone. By 1850, that had dropped to 50%. Today it is a little more than 11%.~The Wall Street Journal, September 20, 1996
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