Graphic from The New York Times
Prescient and perceptive, David Leonhardt has earned my respect and admiration over the years. Most recently, his column last week–headlined “The Bears and the State of Housing,” about which more below–got me thinking. Which is the point.
A dummy, Leonhardt isn’t.
According to a Times bio, he is a New York native who studied applied math at Yale and then worked for Business Week and the Washington Post. Since 2000, he has written for the Times and has been a columnist there since 2006. He was one of the writers who produced the paper’s 2005 series on social class in the United States.
His “Economic Scene” column on Aug. 15, 2007 provided rare early warning, which I unfortunately failed to heed, about the Wall Street’s euphoria. Said Leonhardt:
Going forward, one possibility is that the boom will continue. In this case, the [Benjamin] Graham-[David L.] Dodd P/E ratio doesn’t really matter. It is capturing a reality that no longer exists, and stocks could do well over the next few years.
The other possibility is that the boom will prove fleeting. Perhaps the recent productivity gains will peter out (as some measures suggest is already happening). Or perhaps the world’s major economies will slump in the next few years. If something along these lines happens, stocks may suddenly start to look very expensive.
In the long term, the stock market will almost certainly continue to be a good investment. But the next few years do seem to depend on a more rickety foundation than Wall Street’s soothing words suggest. Many investors are banking on the idea that the economy has entered a new era of rapid profit growth, and investments that depend on the words “new era” don’t usually do so well.
That makes for one more risk in a market that is relearning the meaning of the word.
With regard to last week’s column, he deftly analyzes what it will take for the housing market to recover.
If you believe housing is a luxury item on which people will spend as their income rises, Leohnardt writes, then you’ll think that prices will rise as fast as income in the long run and that houses are not not much overvalued.
However, if you consider housing to be a staple such as food and clothing, you’ll expect prices to go up only about as fast as inflation–that is, not so fast.
(For his reasoning, you’ll have to dip into his whole column.)
Citing data from Robert Shiller, Leonhardt makes the point that societies spend more and more on housing as they become richer. As a consequence, he gives the same advice I have repeatedly given to my clients and my readers:
The best advice for homeowners and would-be buyers may be to think of a house not as an investment, first and foremost, but as a place to live. If there is a good chance you will move in the next three years or so, you should probably rent. The hassles of buying and the one-time costs are just too big. Plus, house prices are not low in most places today.
You can see why I like the guy.
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Malcolm Carter
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Charles Rutenberg Realty
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