When will our economy begin to recover? Not until US homeowners wake up and realise that their houses are worth what all assets are worth: what someone will pay for them.
The NYT’s David Leonhardt chronicles the dreamworld inhabited by most US homeowners, a bright cartoon-land in which the value of their neighbour’s house has dropped by 30% but theirs is still worth more than they paid for it at the 2006 bubble peak. These homeowners refuse to move or sell until they can “at least break even,” which means they’ll stay in their depreciating assets for years while skyrocketing inflation reduces the value of whatever they eventually get by about 4% a year.
Of course, those who inhabit only the digital world shouldn’t cackle too loudly: As Fabrice Grinda observes, start-up owners behave just the same way–refusing to sell a dollar of equity as prices drop…right up until they run out of cash.
In any event, our economy won’t truly recover until house prices adjust. And in the housing market, at least, price-to-income and price-to-rent ratios suggest that that “adjustment” is likely to be down.