My regular roundup of the week’s best reads.
The US blogger Barry Ritholtz says US houses are still significantly over-valued [1]. That would be bad news for everyone, given that the US consumer is vital for a global recovery.
Unlike in the UK, house prices in the US did actually go pop a few years ago. They stayed down, too. And not just in the sub-prime bayous and inner-cities, either, but across the board.
In fact, I’ve wondered if I’d be tempted to buy a US investment property were £1 pound still worth $2, as opposed to the $1.50 it currently gets you.
According to Ritholtz, buying now would be a big mistake:
Today, residential real estate confronts numerous headwinds: Credit, once given to anyone who could fog a mirror, is now tight. Hence, demand is far below what it was during the past decade. Home prices are still unwinding from artificially high levels, and remained over-priced. Inventory is elevated. Unemployment remains high. A huge supply of shadow inventory is out there: Speculators and flippers who overpaid but have held onto their properties await modestly higher prices to sell. Bank owned real estate (REOs) continues to increase. We are barely halfway through a decade long foreclosure surge.
This is known, or at least should be by those who have looked at the data. I cannot explain why some economists still have not figured this out.
In my analysis, price stands out as being the prime mover of the next leg down. High unemployment, and a decade of flat wages aren’t helping to create any new housing demand. And the millions in homes they cannot afford will eventually add more pressure to inventory and prices.
It’s prices-to-rents that I nowadays find most interesting. (The alternative, price-to-earnings, has been trending higher for decades, after all).
Ritholtz offers the following graph:
[2]Click to enlarge
While this graph does suggest house prices still have a little way to fall, what strikes a UK reader is the magnitude of the correction that’s already taken place.
Here in Britain house prices have already partly bounced back, with Santander this week reporting that there are still five times as many property millionaires [3] as a decade ago:
While the credit crunch led to over 43,000 homes losing value and falling below £1m between 2008 and 2009, the statistics now show a recovery in the market for million pound properties.
Over the past year alone, the number of properties valued at £1m or more rose by around 29,000, boosting the number of property millionaires – the owners of these properties – close to the early 2008 peak when there were 147,000 of them.
Having barely wobbled and rebounded in London, UK house prices remain significantly elevated according to The Economist. Using the same price-to-rent analysis as Ritholtz applies to US home values, it said in April that UK house prices are 30% over-valued [4].
The snag? A price-to-rent analysis has been concluding the same thing since 2004, as some of us know to our cost [5].
Unlike the bearish sentiment in the stock market, few are predicting house price falls [6] in 2010. Ironically that might just make a correction more likely.
The best of the blogs
- I know when the jobs will return – Weakonomics [7]
- The role of luck in retirement returns- The Digerati Life [8] (by Mike [8])
- UK linkers are becoming stinkers – Bond Vigilantes [9]
- Lessons from a stock newsletter scandal – My Money Blog [10]
- Are IPOs bitter lemons? – The Psy-Fi blog [11]
- How wealthy are you? – Investor Junkie [12]
- Stock markets are completely rational – Andrew Hallam [13]
- Choosing a target date fund (US) – Get Rich Slowly [14]
- Gorging on hotdogs and bonds – Investing Caffeine [15]
- Patience is required – UK Value Investor [16]
- US house prices have further to fall – The Big Picture [1]
- Will retiring boomers affect the stock market – Five Cent Nickel [17]
From the financial big boys
- Gold: Store of value? – The Economist [18]
- Why are companies still so cautious? – The Economist [19]
- BP’s partners shirk blame [No wonder seeing how it’s been treated!] – BBC [20]
- Pension losers in the switch from RPI to CPI – FT [21]
- Tax risks of offshore ETFs [Pretty much why I only use iShares] –FT [22]
- Screening for quality dividend paying companies – FT [23]
- Bear market just took a breather, warns FT’s chartist – FT [24]
- Absolute return funds fail to live up to name [Told you [25]] – The Guardian [26]
- Current best savings bonds – The Telegraph [27]
- Advisers peddling poor investment bonds [Gasp! [28]] – The Independent [29]
- Grumpy old men bank in the making – Peston [30] at the BBC
- How to tell if you’re a successful investor – The Motley Fool [31]
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