Friday, August 17, 2007

What is Your Measuring Stick?

"Home prices behave the way they do because housing is not a typical consumer good. Rather, it is a capital asset for which the price is set by the markets for capital assets. ... 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. ... I see [housing] as having appreciated for the same reason that the prices of commodities and other tangible assets have appreciated. In nominal dollar terms these prices have to rise in order to maintain the status quo in real terms. ... I define the 'real price of housing' as the ratio of the national home-price index to an index of precious metals prices while the nominal value refers to the price in dollars", David Ransom in the WSJ, 17 August.

I am in substantial agreement with Ransom. However, I feel housing "got ahead of itself" since it is a unique asset available to consumers, i.e., its purchase is usually highly levered and gives an individual an opportunity to short-sell the dollar over long periods of time. The "profit" in owning real estate comes from being able to repay your mortgage in dollars of decreasing value. While the dollar price of housing may not fall, its "real price" as expressed in ounces of gold may. I think, will.

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