In a letter to the FT published on 14th April I observed that America had done well for about 50 years to avoid our irrational obsession with leveraged home ownership as a route to wealth creation. Would that we had been so lucky. Of course, they could not resist our corrosive export for ever and now they are paying a heavy price for it.
read more Commentary by Stuart FowlerPublished in FT, 14th April 2008 (Letter by Stuart Fowler)
read more News by Stuart FowlerPrevious posts have focused on the unprecedented boom in US house prices, as the source first of liquidity problems, then credit problems and eventually recession. America has been in denial. Read this very measured testimony to a Congressional Committee by Prof Shiller (creator of the house price index used on this site) to get a sense of the impending disaster in America. The rest of the world is always a party to any US recession but it also carries a lot of the dodgy loans on its own books – in banks, hedge funds and therefore indirectly in individual portfolios and corporate pension funds. When you look at the accompanying graph of real house prices (ie deflated by general inflation or relative to the prices of everythign else) remember that this is absolutely unprecedented in the US, where both land and building costs have been quite stable relative to prices generally since the 1950s.
read more Commentary by Stuart FowlerGovernments’ boast that they had succeeded in taming both inflation and the business cycle was always a hollow one. The lie was given by rampant house prices and commodities, massive speculation in investment structures that barely existed a decade ago and record levels of debt on both governments’ and households’ balance sheets. Monetary authorities succeeded in cheating recession after 9/11, which coincided with an incipient downturn, but economic activity continued to expand only at the cost of unsustainable strains in financial balances between the key sectors making up the economy. Thanks to a feeding frenzy in the housing market, none was more extreme (in terms of flows as well as balances) than the US household sector.
read more Commentary by Stuart FowlerWe have updated the Nationwide house price index through June, expressed in terms of deviation from a sustainable long-term trend. Our way of measuring house prices focuses on house prices as a cycle in real terms, in common with our approach to other assets. The index from 1957 is deflated by general inflation and then a trend fitted (using a simple regression technique), firstly for the whole history up to the time of the observation (hindsight-free) and secondly for the whole period to date. The curent level relative to trend is expressed as a ratio, equivalent to overvalued, undervalued or normal. Both ratios show extreme overvaluation and have been rising rapidly for the past four quarters.
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