Friday, August 17, 2007

Housing Undervalued?

David Ranson, President of H.C. Wainright & Co. Economics, has an editorial in the WSJ today that explains the run up in housing prices as a response to inflation:

Inflation tends to boost housing prices in the same way that it boosts the price of any tangible asset. And inflation is surely a major part of the housing-price story. Over the past three decades, the price of housing at the national level has risen at a rate similar to the growth of nominal GDP, and the correlation between housing prices and GDP is statistically significant. But the relationship between housing prices and the prices of highly inflation-sensitive assets such as commodities is much more impressive than the relationship with the economy. There is a particularly strong correlation between percentage changes in housing prices and percentage changes in the price of gold -- especially when a short time lag is taken into account.

I have spoken for years about the Fed induced inflation that almost everyone, including the Fed, is overlooking because it doesn't show up in the CPI. Today's action by the Fed signals that the inflation will continue and the basic thesis of the editorial is that compared to gold and other commodities, housing is actually underpriced. That seems about right to me, but I wonder when we will start to see this manifest itself in the housing market. With everyone negative on housing a good contrarian is tempted to take the opposite side of the bet, but it seems a little early just yet. Of course, the undervaluation could be solved by a fall in commodity prices as well - something that Mr. Ranson doesn't discuss.

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