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Opinions and observations expressed on this blog reflect the authors' individual experiences and should not be construed to be financial advice. None of the members of this blog are licensed financial advisors. Please consult your own licensed financial advisor if you wish to act on any recommendations here.

Wednesday, April 6, 2011

Calculated Risk: Nominal House Prices May Bottom This Year

Bill McBride at Calculated Risk has made a prediction of house prices, at least in nominal terms, bottoming out this year. I have to agree for a number of reasons that he has enumerated. Price to rent ratios, typically one of the best indicators of the relative valuation of housing, have normalized to the extent that much of a further decline is very unlikely.

This is not to say that housing is a particularly good investment relative to other assets. History teaches us that recoveries from real estate crashes, whether they be Japan in 1990, select U.S. markets in the early 1990s, Hong Kong in 1997, or any number of U.S. markets in the early and mid-1980s, are very slow and painful before they start gaining momentum. As such, expecting any large bounce back in the intermediate term is not a good idea. House prices have declined to reasonable levels rather than undervalued levels.

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