When Trends Diverge Watch Out

TW: There have a been a thousand charts created trying to dissect the housing bust. This one lays things out fairly clearly. It is also relevant for the overall stock market. Asset classes can diverge from the overall economy (i.e. GDP) for awhile but in the long-run they should largely converge.

Real estate valuations moved roughly in line with overall GDP for decades, then moved ahead in the early 1980's but stayed anchored to GDP, then boom real estate shot ahead starting in the late 1990's, becoming completely unanchored. Those expecting a true bottom soon should pay heed.

The chart portrays another problem. The "false" positive of a new real estate paradigm (one not anchored to normal economic metrics) ran for almost ten years (late 90's to '06/'07). A trend running that long tends to suck in many folks and it takes a true crisis to reverse the false/new paradigm.