If Housing Were Priced in Gold 58 comments
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Pricing U.S. homes in gold reveals that housing has fallen by two-thirds from its 2005 peak.
Frequent contributor Harun I. suggested an interesting relative-value experiment: how has housing performed in the past 20 years when priced in gold? Readers of this site know that relative performance/purchasing power has long been a theme of Harun's and of this site.
Considering all metrics of value in terms of purchasing power reveals much more insightful measures of value than nominal prices.
For instance, measuring the cost of housing in terms of "how many loaves of bread would be needed to buy a house?" is a more accurate measure of purchasing power and valuation than measuring housing in terms of dollars, which have lost 25% of their value to inflation in the past decade and much more when compared to other currencies.
Since gold is a universal metric of money, let's see how housing has done when priced in gold. Yes, I understand you can't live in gold or plant trees in gold, but the exercise isn't to suggest housing is "only" an investment like gold--the point is to seek an understanding of the relative peaks and valleys in housing valuation.
In other words, is housing "cheap" now? There are various accepted metrics of approaching this question, for instance, comparing the equivalent costs of renting versus buying. Another is to ask if buying a house and renting it out at current market rates would yield a profit, and if so, how does that profit compare to other alternative investments?
Priced in gold, housing has already fallen 2/3 from its 2005 peak when priced in gold.
Harun's charts are large-format, so I have posted thumbnail versions below. Just click on the thumbnail to open the full-sized chart in a new browser window.
The charts plot the well-known Case-Shiller Housing Composite as the proxy for the U.S. housing market.
Harun offered these comments on the charts and the housing/gold ratio (relative-strength).
The first chart is the S&P Case-Shiller House Price Composite (black line). The red line is an RS (relative-strength) of the composite to gold. Historical comparison suggests home prices are still overvalued. The red line indicates that homes are worth in gold what they were in the late 1980's while nominal prices remain elevated.
Click on chart for a full-sized version in a new browser window.
At the peak in 2005, the median home price equaled 490 ounces of gold. The present median price is worth about 160 ounces of gold, or roughly the same valuation as 1988.
Nominal housing prices have returned to 2003 levels. But when priced in gold, the 2003 valuation was 420 ounces of gold. Now that nominal prices have returned to that level today, the median house will only fetch 160 ounces of gold.
But if nominal prices revert to pre-bubble valuations (1997-98), which is the typical course of popped asset bubbles, then we could see housing become even cheaper when priced in gold.
That is, if gold continues rising and housing continues declining, then it is certainly possible that the median house price could fall to 100 ounces of gold--a mere 20% of its 2005 peak.
Harun's second chart plots the housing/gold ratio's rate-of-change.
Click on chart for a full-sized version in a new browser window.
Here are Harun's comments:
In 2001 the median house fetched 460 ounces of gold and the median price was about $115,000, a 4-to-1 ratio ounces of gold per dollar of house value. By the valuation peak in 2005 that ratio had fallen to 2.17-to-1. The boom period actually saw an overall loss in value.
Stated another way the best time to sell your home and buy gold actually occurred in 2001; you would have received twice the gold which would have seen very handsome appreciation. The truth: the boom was over by the time everyone thought it had begun.
Priced in gold, the median house bought 460 ounces of gold in 2001 and 490 ounces at the peak in 2005--a gain of 6%, considerably less than the nominal price in dollars.
Had a homeowner eschewed the blandishments of the housing bubble in 2001 and sold his/her home for 460 ounces of gold and rented for eight years, he/she could now buy a home for 160 ounces of gold and have 300 ounces in hand.
Here is a chart of the Case-Schiller Composite plotted in percentage points of rise or decline.
If we looked only at this chart, we might reach the conclusion that housing has "bottomed" and that it's "cheap." But if we price housing in loaves of bread or gold, we might reach a completely different conclusion: priced in commodities or gold, housing may not have reached its nadir, and other stores of value might retain more purchasing power than housing.
Should gold plummet, then of course housing would rise in relative performance even if it remained flatlined in nominal prices. If gold were about to fall dramatically, then this could be the relative valley in housing/gold valuations.
But the more likely scenario remains a continuing decline in nominal housing prices back to pre-bubble valuations. In this case, even if gold remains flatlined at $1,000 an ounce, then it will take fewer ounces of gold to buy a house in the future.
The point is to consider housing in relation to purchasing power/relative performance, not just in nominal dollar terms. Housing will always have value as shelter and land will always have value as productive dirt, but we must be skeptical of the constant hype that "a home is your best investment."
For the past eight years, when priced in gold, that has been patently false.
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Exactly.
The US was supposed to have the most sound financial system in the world and even they turned to printing money to bail themselves out of trouble. The fact is humans have consitently proven themselves (to various extents) incapable of showing restraint in controlling currency.
Gold instrinsictly controls outself. It's ironic to hear all this talk of how volatile gold is because what it comes down to is the supply itself is highly dependable and predictable. A mine producing gold that suddenly faces a halving in the its price isn't going to double its output. In fact, the opposite occurs. Your gold will drop in value but so will the world supply of gold that is profitable to dig out of the ground.
Similarly, when the price of gold is skyrocketing, the production and supply of gold is still limited by the inherent design of a mine and the difficulty in significantly increasing its output, and the staggering capital investment required to discover and open a new deposit.
For example, we're just now raising our pit designs from being based on $700/ounce to $800/ounce. The investment and work and simple technical feasibility of pulling this off is staggering.
The supply of gold will always be inherently controlled by its very nature. Nobody is going to suddenly pump 100 million ounces of gold out of thin air. And frankly no one should be able to do the same with currency either! Who is a politician to de-value your net worth by diluting your currency?
See some people have difficulty placing such value in a metal, as shown in this very comment section. Frankly, it is a difficult concept to wrap your head around. But currency is even more so difficult to comprehend since the supply, as our governments have proven, is unlimited.
In theory, if sound monetary policy on behalf of government could be depended upon to create a rock solid dependable currency, gold should have no use, no value. But what are the odds of that ever happening?
Basically you can come to the same conclusion by looking at the Gold-Dow ratio.
This is important because it this ratio is the true predictor of Gold's ultimate price in the next 5 years: It will be worth between 50% and 100% of the Dow, be it $3000 Gold/6000 Dow, or $9000 Gold/18000 Dow.
On Sep 24 10:43 AM Boxed Merlot wrote:
> On Sep 24 08:04 AM jrainspe wrote:
> Contractual agreements are out the window as soon as it is determined
> the game was rigged. In the old west it was customary to shoot cheats
> and horsethieves on the spot. Seems like a reliable deterrent. Maybe
> financial and insurance concerns should have been more patient and
> not tried to rob us of our future as well as our present.
I’m not so sure I’d use the term “patient”. These concerns you mentioned laugh at the notion of patience. You’re spot on describing them as cheats and thieves but I would add “liar” to the resume too.
Our Congress has been charged by the constitution to establish uniform laws of bankruptcy and our recent GM / Chrysler / UAW / bondholder fiasco has undoubtedly exposed their hand of 5 aces.
When the rules change like this, you’re right, game over.
If you are going to use credit as a means of exchange, the collateral for the credit must maintain its value over a long period of time. Our homes served this purpose for a very long time, until the people in the financial industry figured out how to entice people to create more credit money. So much credit money was created that it created the housing bubble, causing our economy to collapse.
We are going to slowly recreate a working economy again, but it will take "all the Kings men" quite awhile to put "Humpty Dumpty" back together again.
I am a retired economic analyst and a economic scholar. You can read economic policy papers I have written to speed up the process and control inflation and inflation psychology without creating a huge government deficit, as we have done. economysflaw.wordpress.../
On Sep 24 07:46 AM chap08 wrote:
> When you compare two investments in this way, the outcome always
> says more about the more volatile investment (gold) than the less
> volatile (housing). It's an interesting exercise but it doesn't really
> tell you anything about the future.
>
> In looking at housing values, nominal dollar values still make the
> most sense. That's because people are anchored on the dollar value
> they paid, they get wages in dollars, rents are paid in dollars and,
> most importantly, people think in dollars. Perhaps the world would
> be a more rational place if people thought in terms of gold, but
> they don't.
> …We have changed from a gold backed currency to using credit as a means of exchange.
> If you are going to use credit as a means of exchange, the collateral
> for the credit must maintain its value over a long period of time.
> Our homes served this purpose for a very long time, until the people
> in the financial industry figured out how to entice people to create
> more credit money.
We may be getting to the crux of the matter here and it raises many unaddressed issues that seem to be in the on deck circle waiting to come back up to bat as we go through the line up again.
Bribing globally connected financial institutions with US taxpayer $ to continue to manipulate our stock, bond and futures markets just because they have roots in our political and financial machines is patently absurd. They have demonstratively proven themselves to be utterly bereft of integrity and evidently hell bent on reducing this and any nation with a modicum of decency to fall to their knees at their presence.
“Credit Money”?!? What kind of nonsense is that?? It’s time to tell the king to put some clothes on because we’re tired of watching him prance around in his altogether nothingness!!
(IMHO of course)
"The author fails to consider that much of that free 300 ounces of gold would have been eaten by skyrocketing apartment rents rising with inflation; he assumes the apartment rent for the same square footage will just cost the same as the mortgage payment was in 2001. Good luck with that."
On Sep 24 09:27 AM TonyCinTX wrote:
> Actually the value of the home is in its utility, like any other
> machine (e.g. car, laptop, lawn mower), not what one can sell it
> for. After all, you are going to have the expense of living somewhere
> no matter what. It is incorrect to say sell your home and rent: Your
> mortgage payment does not rise with inflation or fluctuate with demand,
> your apartment rent will never decline.
>
> A rise in Gold signals inflation of the dollar, and inflation is
> either caused by or will produce salary increases. But your mortgage
> payment is FIXED, so while the number remains the same, as a percentage
> of income it is reduced by inflation. We also have the situation
> that home buyers tend to be younger and will earn more as they grow
> into their careers. This is why anytime you talk to somebody with
> a twenty year old mortgage their payment seems a ridiculously low
> fraction compared to typical apartment rents for the same square
> footage.
>
> The author fails to consider that much of that free 300 ounces of
> gold would have been eaten by skyrocketing apartment rents rising
> with inflation; he assumes the apartment rent for the same square
> footage will just cost the same as the mortgage payment was in 2001.
> Good luck with that.
>
> I am not arguing that money cannot be made on bubbles if you know
> when they are coming and when they are ending; far from it. But in
> times of inflation, a fixed-rate mortgage payment is your friend.
You obviously like being rude. I advise you to learn something first because rude and stupid is a bad combination. Start with this:
To identify which of a pair of investments is the most volatile, you don't just think "s**t, which went down most recently?". No, you do it with something called math. First you need some valid data. When you have this you will see that housing has not gone down by the 60% you mention. You also need a common measurement. The dollar is perfectly fine for this - it doesn't matter so long as you use the same for both. You obviously don't think much of the dollar, so use the Korean won or the Malaysian ringgit instead, it doesn't matter. Then you work out the standard deviation of period returns over a sensibly long timeframe. When you have done this, you will see that gold is more volatile than housing. You think that recent record declines in housing from the peak 3 years ago make it volatile? Well, in the past, gold has fallen more in 2 months than housing has fallen in these 3 years - now that's what I call volatility.
On Sep 24 03:15 PM dirtyharry wrote:
> Ummm.... Earth to chap08 - developing more rational thinking / valuation
> models was the whole point of this article. Also, I had to laugh
> when you wrote with such presumption that that gold is the more "volatile
> investment." Perhaps you've lived in a cave for the last three
> years so I'm happy to enlighten you: some housing markets have seen
> price declines of greater than 60% (and that's using the "stable"
> dollar as the yardstick). That's some serious volatility!
>
> Talking about how people are "anchored" to the dollar defines why
> the comparison to gold was being made in the first place. The whole
> purpose of this comparison seems to have just flown right over your
> head..... and calling this an interesting exercise with no predicitive
> capabilities also misses the point. If you use a historical yardstick
> like gold to measure and compare valuations to a long-term mean,
> you will almost certainly be able to determine if a market is relatively
> undervalued or overvalued.
>
> One final note - it's not the gold that's volatile anyway. Gold
> is gold. It's stable and is stationary. In biblical times 1 oz
> of gold bought 300 loaves of bread (like today). In Napolean's age
> 1 oz of gold bought a fine man's suit (like today). You see - gold
> is virtually unchanged. It's EVERYTHING ELSE that is volatile and
> moving RELATIVE to gold.
goldnews.bullionvault....
> Many societies prefer gold-it is considered as big investment, as
> opposed to housing. Housing prices can fluctuate now and then. But
> then owning a home can also be an asset. Times are trying now. Only
> when the restructuring gets stable and the pricing reconciles and
> reaches an acceptable and affordable level, the industry is expected
> to recover…
I agree and was possibly a bit too emotional in my previous post re: “Credit Money”. The point is, our economy would be better served with a hard currency and private credit than the credit initiated at some ether land controlled by forces exempt from any nations systems of laws. Had our Congress done its job of maintaining control of uniform bankruptcy procedures, establishing proper weights and measures, coining money, interstate commerce and other constitutional directives rather than meddling in social engineering, our homes and lives would not have been commandeered by international concerns as we see today. They not only fell asleep at the wheel but drove us off the cliff while in their dream state. imo
ALL of your assets against each other and so have a clearer view of what is what. There's no right or wrong in this!! You smart guys wear my butt out.
On Sep 24 10:44 PM harrison20 wrote:
> Yeah and if you sold your house and bought the Nasdaq in 1997 then
> houses would be cheap when you sold the nasdaq in 2000. But wait
> there is more! What if you didn't rebuy your house in 2000 and instead
> bought gold and held it until 2009 and then sold the gold and bought
> you house. Well houses since 1997 have decreased in price way more
> dramatically then this article states. Stupid stupid stupid Measuring
> the value of a home in terms of whatever asset class is currently
> in a bubble is a waste of time. Actually should have thrown oil
> into this argument as well since it is either going to $30 or $200
> depending on whom you talk to.
In 2006 it would have gone for about $2,000,000 (my folks sold out in the '80s, but it has sold several times since then). Gold was $603 that year on average. So the house was worth about 3300 oz of gold.
It sold for $1.6 last year. Last year gold averaged about $872, so about 1800 ounces.
I don't know. I think of gold as a hedge, not an investment, although I suppose in this environment it can be both. A house is where you live.
I prefer a diverse bag of equities that have paid a growing dividend over a long course of years, bought in good times and bad.
That's the whole purpose of any long term real estate investment program - rental income. Your comment is like saying that cars are really no good without gas. But if you have gas to fill up the tank, then their good and they should work.
I'm pretty sure your comment is addressing the buyers of the past that were flippers - trying to make a quick gain from price appreciation. I assure you - if you own real estate free and clear in even a halfway decent area, you will receive rents that far exceed the property taxes and upkeep.
Furthermore, the reason why financial consultants "beg" people not to buy real estate is because they want the people to invest in their mutual funds and other financial vehicles. If they are not real estate agents, they would lose out on commissions. Real estate as an investment is generally misunderstood. Assuming an individual is not buying some overvalued Miami condo and they actually know what they're doing, it's actually quite EASY to make 20%-35% annually in real estate.
Why? Because real estate provides growth via: 1) appreciation 2) rental income 3) tax write-offs. Furthermore, even today investment properties can be purchased with 20% down giving 5 to 1 leverage. The leverage is really key to making the returns superlative.
Despite markets like Los Angeles, Miami, Las Vegas, Phoenix etc etc all blowing up, there are many staple markets around the country that saw values drop LESS than 10%, and are currently increasing in value. Areas like Kansas City, Charlotte, and Austin were down 3% to 7%. Austin is now up, and the other two cities are almost even.
So please, don't try to convince me and others that real estate is a bad investment. It's only bad if you don't know what you're doing.....and if you're not collecting rent (you made it as if the rent was an afterthought), you don't know what you're doing.
On Sep 24 10:42 AM Moon Kil Woong wrote:
> Isn't the graph bad enough as is. The biggest issue about owning
> property is if you own it free and clear you still pay property tax
> and costs to maintain it, meaning if it doesn't go up that amount
> you loose even if it doesn't drop in value. Furthermore if you pay
> mortgage you loses interest payments as well. That's why real financial
> consultants beg you not to look at it as an investment. Perhaps a
> forced savings program but not as an investment unless you rent it
> out.
You need to know what the world markets are doing and follow them daily. Thank goodness we can follow gold 24/7 online.
Technology also helps us today so we can profit in all market conditions. Below you'll find a helpful tool.6bbf50zcnqtl4n0b9orb5w... I don't know if any of you have ever used software, but it really does help. Great Article by the way.