I discovered the great chart below at Chart of the Day. It basically tracks the median price of a single-family home in the United States and divides it by the price of one ounce of gold. The result tells you, in a store of value that pre-dates all paper currency and will no doubt outlive any single paper currency, what the value of US housing is today and what it has been for the past 40 years.
There are those who will protest that “gold fluctuates too wildly” to provide a worthwhile indicator of value. I would disagree. While gold may fluctuate in dollar terms, or euro terms, or yen terms, it is often the value of those currencies that fluctuate around the price of gold. The long-term trend, of course, is that all paper currencies are inflated – slowly, for the most part, but inexorably. That’s why eggs that cost 61 cents a dozen, bread that cost 25 cents for a pound loaf, milk that cost 65 cents a half gallon, and gas that cost 36 cents a gallon in 1970 are, um, well, rather a bit higher today! But it can well be argued that the same ounce of gold that would have bought x quantity of all those items in 1970 will still buy roughly the same x quantity today. (Yes, even after the costs of extracting oil and natural gas have risen, even in real terms.)
As the chart below shows, back on April 28, 1975, when gold was selling for $167 an ounce, and the median price of a new home was $39,200, it took something like 235 ounces of gold to buy a house. (You can add to the granularity of this chart by viewing the following two websites, as I have: for gold prices day by day since 1970, here, and for the median price of a new single-family home in America, month by month, you can view this .pdf from the Census Department.
On April 28,1980, during the last big shakeout low for real estate, with gold at $524 an ounce and the median home price at $63,100, it cost just 121 ounces of gold to buy that dream house. (Think inflation isn’t a factor? 1980 was the low in terms of gold spent to buy your home, but the house price was still more than 50% higher in dollar terms! By the way, don’t be fooled by the high cost of a home relative to gold at the beginning of the chart. Back then, the price of gold was controlled by the central banks and artificially constrained at roughly $35 an ounce; individuals in many nations were not even allowed to own gold.)
Fast forward to 2005. By 2005, the soaring speculative frenzy took home prices to ridiculous levels. Two-bedroom, one-bath 1940s bungalows on a 6,000 square foot lot were selling for over a million bucks in LA. Cookie-cutter, nothing-special condos were selling for a million in Miami. And on and on. On April 28, 2005, just before the bubble began to show stretch marks from over-inflation. With gold all the way up to $433 an ounce and the median US home selling for $236,300, it would have taken 546 ounces of gold to buy that house.
Today, April 29, 2010, that same house can be purchased for roughly 160 ounces of gold, or 70% less! What are the implications of this?
For me, there are a couple. First of all, unlike dollar bills, an ounce of gold will still get you the same amount of eggs, milk, bread, gasoline and house that it would back in the 1970s, 1980s, and since. I plan to add to our gold positions on any pullbacks.
Second, sales of homes count for those who make their living selling homes. Sales count for banks stuck with too many properties. Sales count so the government can tell us everything is rosy and happy days are here again. But sales do not count in terms of signaling an economic recovery. If 100 houses sell for $300,000, $30 million has been paid by buyers who think their new home is priced fairly at that level. But if 100 houses go begging at $300,000, and at $250,000 and at $200,000, but are picked up when they reach $170,000, only $17 million has changed hands. Now make that 100 homes 1 million homes and the difference is $130,000,000,000 -- $130 billion – that changed hands only because the price had dropped so much.
I will believe the turnaround in residential housing is here when both sales and prices move up in tandem. Until then, I’ll stick with the rental apartment choices I discussed 5 months ago, here.
This chart doesn’t necessarily lead me to conclude that real estate has bottomed, just because it is down 70% in terms of gold. It does, however, make me disinclined to short housing, builders, mortgage firms, and others in the real estate business.
As for which gold companies we like, many of the juniors that are partnered with bigger firms, or financed by them, are attractive. I believe the easiest way to participate in these smaller firms’ possible fortune is via the Market Vectors Junior Gold Miners ETF (GDXJ). But I advise you to research this ETF and its holdings to see if its risk parameters fall within your own. We are in at 24; it’s 28 and change now. I’m still adding to some positions but plan to buy more on pullbacks. When it comes to smaller exploration firms, Caveat emptor!
Author's Disclosure: We and / or clients for whom it is appropriate are long GDXJ.
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