Relative Safety

Housing Market: Investing Safe Haven?

Winston Churchill is famous for saying that "Democracy is the worst form of government . . except for all the others." The same might now be said of investing in real estate.

According to the latest S&P/Case-Shiller Home price index -- quickly becoming the Dow Jones of the housing market -- prices nationally are now down 10% over the last year. As bad as that sounds, consider the following:

--the U.S. stock market is down more than 10% in just the last six weeks. As analysts' pare their 2008 earnings estimates and high volatility continues, "the preponderate risk appears to be to the downside," as Federal Reserve Chairman Ben Bernanke might put it.

--Commodities, led by wheat, gold, and oil, are exploding to the upside. Wheat contracts traded on our very own Minnneapolis Grain Exchange have doubled since the beginning of 2008. Investors' appetite for these items appears to be driven not by fundamentals, but rather by inflation fears and momentum. What do you call markets driven by speculation, untethered from economic reality? A B-U-B-B-L-E (remember those?)

--Another supposed safe haven, U.S. Bonds, have attracted so much capital that they now yield less than inflation. The 10 year bond now yields about 3.5%; the 30 year bond, about 4.5%. Meanwhile, depending on which numbers you believe, inflation is now running between 5% and 7%. Investors focused on protecting principal forget that inflation and diminished purchasing power are to bonds what acid is to paper.

Surveying the foregoing, one might conclude that the housing market doesn't look so bad, after all. Much damage has already been done, sellers in many markets are both motivated and realistic, and the range of choices has never been better, due to record inventory. Such conditions and psychology are usually much more characteristic of market bottoms than tops.

Disagree? There's still time to buy gold before it hits $1,000 an ounce . . .