(07-16-2017, 07:48 PM)pbrower2a Wrote: Low interest rates drive up the value of securities and real estate.
When the asset class is not damaged. Real estate appreciation can be suppressed by the existence of a large glut foreclosed properties in a recessionary business environment accompanied by a deep bear market in stocks. The first creates surplus supply. The second creates low demand for homes and properties. The combination excess supply and low demand means low prices despite low interest rates. Finally a serious bear market suppresses animal spirits, leading to reduced proclivity to invest.
Situations like this typically only arise after a period of malinvestment. My paper shows how the stock market of the 1920's (and today) experienced "stealth overvaluation". Today's market does not look particularly overvalued by conventional valuation. PE is about 22-23 on a trailing 12 month basis. This is high historically, but much lower than it was in 1999-2000. The same thing was true of 1929, when valuations were considerably lower than they had been 25 years earlier. But when you adjust for the effect of reduced capital productivity, the 1929 valuation was the highest in history and the market in that year was prone to a major decline, which is what happened. Today's P/E, after the same adjustment is about 30--same as it was in 2000. So the market is about as overvalued as it was then. This same phenomenon shows up in the ratio of market capitalization to GDP.