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It’s official (sort of). Those who failed to spot the faltering trend in house prices (and the ensuing credit mess) were looking down rather than up. They should have been looking right up  - into the sky - at the moon!

Exhibit 1 - Lunar land prices, courtesy of fixed interest and FX strategy team at UBS:

Meyrick Chapman and his UBS team, architects of the Cheese/Sillier index, say their research led them all the way back to April 1895, when a property assets of a firm called Baldridge Investigating Company were, according to the New York Times  commonly assumed to have migrated to the “other side of the moon.”

But orbitory real estate got serious after 1967 and the signing of the UN Outer Space Treaty, which stipulated that governments cannot claim ownership of the moon, but neglected to mention private individuals or corporations. There was a failed attempt to close this loophole in 1984, but sales of lunar land parcels have boomed regardless.

Chapman et al:

Remarkably, the lunar land index appears to be a leading indicator for US house prices, with some important caveats. For instance, lunar prices appear to have risen sharply between 1997 and 2001, well in excess of comparable US house prices. They suffered a ‘mid-cycle’ retracement in 2002-2003, in the aftermath of the dot-com bust and 9-11, but subsequently surged to historic highs at December 2005, a full 9 months before the peak was reached in US house prices.

From December 2005 to January 2007, lunar prices slumped by 56%, reaching a trough of $16 per acre. It was during this slump that a notorious transaction of 110,000 acres changed hands for $275,000, or 25cents per acre. We excluded this forced sale from the index because it was so clearly out of touch with realistic lunar prices. No doubt the seller is regretting the sale price to this day. Since early 2007, however, lunar land prices have recovered strongly and while they remain well short of historic highs of $37 per acre, they are still 40% higher than in the lows.

Our calculations suggest lunar land prices appear to be a reasonable lead indicator of US house prices by around 12 months. This suggests a trough in US house prices may occur around the beginning of 2008. We would caution that this is a preliminary conclusion and this is most certainly not a forecast.