Today in the Financial Times is a fascinating article about the Equity Risk Premium (ERP). I had been intending to write an article about this topic before the article in the FT was printed. I shall point out that the author started on some good points but needs to elaborate on them. He said the ERP has been 3.9% a year over the last century according to Credit Suisse annual yearbook. What the ERP implies is that because you take more risk to buy stocks than bonds therefore you deserve a premium or extra benefit of stocks returning more than bonds.
The housing market will not repeat its previous patterns over the last 45 years. Using underwriting standards and looking at the inflation adjusted cost of money, we are in a new era in which the eras from 1965 to 2008 are not comparable.