“Post-Bubble Price Behavior”
If you don’t track financial blogs, the Op-Ed pages of The Wall Street Journal, etc. on the state of the housing market, allow me to summarize what the bears are currently saying (my paraphrase):
“Yes, after a 35% price drop nationally, the air has been let out of the housing bubble.
And yes, record-low mortgage rates and rising rents have made owning vs. renting attractive, if not compelling, in many housing markets nationally.
But, after a historic bubble, prices don’t simply revert to the mean, they overshoot on the down side.”
Here is Barry Ritholtz’s take:
Regardless of the asset class ” stocks, bonds, commodities, homes, etc. ” assets do not merely mean revert. We have never seen a stock market that has run up into bubble territory, and then merely reverted to fair value of a 15 P/E. Instead, we careen wildly past that level, to deeply undersold, and exceedingly single digit P/E cheap.
–“The Problem With Home Prices“; The Big Picture (April 4, 2012)
There’s just one problem with the above: it’s not true.
I’ve followed the stock market pretty much daily for a couple decades(!) now, and even at its low point in 2009, stock P/E’s were never “exceedingly single digit P/E cheap.”
That was true for long stretches after The Great Depression, and again in the early 1980’s before stocks began their epic, almost 20 year rise.
However, thanks to what market watchers call “the Greenspan put” — succeeded by Mr. Bernanke’s Quantitative Easing(s), “Operation Twist,” etc. — since then stocks never overshot on the low side.
In fact, they barely regressed to the mean, then quickly rebounded.
I don’t presume to know where housing prices are headed from here — and neither does Mr. Ritholtz — but at least I have my historical precedents right.
P.S.: Don’t believe me?
Read Jeremy Grantham on whether stocks have ever been screamingly cheap — as Mr. Ritholtz posits — in the last decade-plus.
2009? That is analogous to 1973/74 — the middle collapse in the 15-20 year secular bear market.
You need to look at the start of secular BULL markets — the dates to check out are 1982, 1946, 1934, 1921, 1907
Ahhh, now I see the misunderstanding:
I have never said that Stocks were screamingly cheap this past decade. At best, they have been fairly valued once or twice over the last decade (March 2003, and briefly again in March 2009) — but thats at best fair value to modestly cheap. Even October 2002 for Tech was not cheap, because of the number of stocks with no earnings made the P/E too high (Nasdaq 1100 was a good place to buy QQQs, but not due to a low P/E ratio)
Ig you would like to get a better handle on Secular markets, I have written extensively about what a Secular versus Cyclical market cycle is. See these as examples
Or, you can see all 102 posts on Cycles here: http://www.ritholtz.com/blog/category/cycles/ for a group of posts on that)
Last chart — look at the P/E ratios at the bottom of this chart:
You can see exactly when the secular bear market ends, and were a new bull market begins.
Check out Ed Easterling’s Probable Outcomes: Secular Stock Market Insights (excerpted here: http://www.ritholtz.com/blog/2011/03/game-changer/)