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Thursday, December 30, 2010

Is Peter Schiff Right About Housing?

Schiff: ‘Home Prices Are Still Too High’

The market can stay irrational longer than you can stay solvent.

–John Maynard Keynes

Just for argument’s sake, assume that Peter Schiff’s Op-Ed piece in today’s Wall Street Journal is right: namely, that even after a 30%-plus drop nationally the last four years, U.S. housing is still overvalued by at least 20% (never mind various benchmarks indicating that housing has never been more affordable).

Should you heed Schiff’s advice, and wait till housing prices regress towards their historical mean?

Or even longer, until they overshoot on the down side? (as Schiff speculates will happen).

The problem with relying on historical trend lines to make long-term decisions like buying a family home is that you may be waiting a long time.

On the Sidelines

In fact, according to Schiff’s preferred benchmark — “Standard & Poor’s Case-Schiller 10-City Home Price Index” — the last time home prices nationally were at or below their historical averages was . . . 1998.

Ala Keynes, that’s a long time to wait -- presumably in an apartment or rental home -- for a mean reversion.

If you got married and started a family then, your oldest child would now be nearing junior high school while you waited, patiently, for housing prices to correct all the back to the long-term mean.

Understandably, most people don’t suspend their lives based on such historical considerations.

They buy homes when their life circumstances dictate — and they can afford to.

When people have better housing choices buying rather than renting — which certainly seems to be the case today, in the Twin Cities and many other cities nationally — that’s usually what they do.


cottasofia said...

Understandably, most people don’t suspend their lives based on such historical considerations.

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