Kunst

Are U.S. Home Prices Reasonable?

The dollar has lost 23% of its purchasing power in the last 10 years.
The dollar has lost 45% of its purchasing power in the last 20 years.
The dollar has lost 71% of its purchasing power in the last 30 years.
The dollar has lost 84% of its purchasing power in the last 40 years.

Historically, housing prices rise pretty much at the rate of inflation. Housing has been a good investment due to the combination of inflation and leverage (i.e., 20% or less down). The current crisis stems from a debt/credit-fueled increase in prices beyond the trend line. Like a tsunami, things aren't the same when the water/price level returns to normal.

Human nature being what it is, I don't think we (via our political leaders) will accept deflation, even back to the trend. Too many people have mortgages they can't manage, and negative equity in their homes. More importantly, our over-leveraged financial system won't survive another 2-5 years of lower prices.

I'm betting on government-induced inflation. Crank up the printing presses, flood the economy with dollars. Pretty soon, inflation will roar, and kick the trend line up to a new level. The proper solution is lower house prices. The politically acceptable solution is higher house prices. Let's see which wins.