An Upbeat Prediction For The Housing Market

Why the recent disconnect between inflation and housing points to good news ahead.

We came across this article the other day on Scott Grannis’ financial blog. Here’s a summary of his line of reasoning:

The red line measures inflation, which was soaring throughout the 1970’s. It also shows tangible assets, such as housing soaring at the same time. This was a rational response to inflation since tangible assets tend to hold their value during periods of inflation, whereas financial assets, like bonds, tend to lose value. This drove up housing prices.

In the early 80’s when inflation began to fall, the opposite occurred, with a move out of housing and into financial assets, which saw a boom. He notes that the surge in housing prices in the early 2000’s was not accompanied by inflation, but rather, it was driven by other factors such as the invention no down payment loans, no documentation loans, interest only loans, and negative-am loans.

It led to a housing bubble. He says that the collapse of the housing market and the financial panic that followed sent households rushing toward the safety of savings deposits which are up over $2 trillion in the past three years.

Now that housing price have come back into line with inflation and people are regaining confidence, he sees this process turning around and people beginning to shift money back into equities and into housing given the very cheap prices and low financing costs. The recent rise of the stock markets to 3 years highs seems to bear this out.

Even here on Hawaii’s Big Island, we have seen a continued shrinking housing inventory with some early indicators that prices are beginning to turn. We heard a similar story from a Seattle Realtor a few days ago. Mr. Grannis feels the demand for housing will be more than enough to absorb all the foreclosures banks may dump on the market. The downside may be a rise in inflation as this process unfolds. Read the whole article.