In Real Estate,
Think Global

The mantra that all real estate is local looks more suspect than ever, now that a national home-price bubble has burst. In today's interconnected marketplace, real-estate trends might follow a global pattern, with overseas housing markets following the lead set by the U.S.

In Europe, slack lending policies and low interest rates helped drive up property values just as they had in the U.S. In 2006, home prices rose at a double-digit pace in Ireland, Spain, France and Norway, according to Moody's Economy.com. They shot up in the United Kingdom, too, after briefly flattening out in 2005.

The air now looks like it is leaking out of Europe's housing balloon. Prices in Ireland fell 6% in the fourth quarter of 2007, after gaining 13% a year ago. In the U.K., prices gained 4.8%, compared with a gain of 10.5% a year earlier. Spain's 4.8% gain compares with an increase of 9.1% the previous year.

The International Monetary Fund said in a recent report that a slowdown in credit growth in Europe is emerging as "several countries face housing markets considered overvalued." It expects gross domestic product in the euro zone to grow by 1.6% in 2007, down from 2.6% in 2007.

Consumers are feeling it. In the fourth quarter, real European consumer spending fell at an annual rate of 0.3%, compared with a 1.9% annualized increase in the U.S., according to Citigroup.

It's not just Europe. In Thailand, prices for detached homes were down slightly in the third quarter from a year earlier, according to Thailand's central bank. Townhouse prices have flattened.

The upshot: The housing engine that helped drive the global economy is running out of gas, more evidence that a recovery could take longer than many expect.

In Stock Valuations, Rosy 2008 Assumptions

The stock market's comeback lately erodes the argument that equities are cheap.

As of Monday's close, the Standard & Poor's 500-stock index was priced at about 16 times the past four quarters' earnings, nearly matching the market's long-term price-to-earnings ratio.

The S&P looks better relative to expected earnings for 2008, with a "forward" price-to-earnings ratio of about 14, below the long-term average. The trouble is that forward earnings are based on optimistic assumptions about earnings growth. They presume earnings will grow 17% in 2008, more than reversing a 6% 2007 decline and more than doubling their average growth since 1989 -- despite the fact that analysts agree earnings are likely shrinking in the first quarter.

If earnings merely return their average growth rate of 8% -- unlikely, if the economy really is in recession -- the forward P/E rises to 15. If earnings fall 17.5% -- as they have, on average, during the past three years that included recessions, according to S&P data -- then the forward P/E ratio rises to 20, undermining the idea that stocks are cheap.

Some market bulls suggest the recent rallies in financials and other interest-rate-sensitive sectors are a sign the market has begun to act as it typically does at the start of new economic cycles.

But maybe these "early cycle" bulls are getting ahead of themselves. The market doesn't even seem to have priced in much of an earnings slowdown yet.

-- Mark Gongloff

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