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Guest Post: Priced In Gold, Is Housing A Buy?
Submitted by Charles Hugh Smith from Of Two Minds
Priced in Gold, Is Housing a Buy?
What is the relative value of housing if we price it in ounces of gold?
My basic point of view is that nominal prices and broad terms such as deflation, inflation and growth should be viewed with extreme skepticism. The more useful approach is to examine the purchasing power of various assets and the the purchasing power of the income streams generated by those assets.
Put another way: to value housing, let's compare the price of a house priced in loaves of bread, or ounces of gold, or barrels of oil to historical norms. Secondly, let's look at the income stream generated by the median-priced home (that is, the median rent and net income after all expenses of maintaining and paying for the rental home are deducted) and ask how many loaves of bread, ounces of gold and barrels of oil that net income can buy.
Corrospondent Bart D. has charted some relative values for essentials in Australia, and I will share his fascinating charts next week. Inspired by his work, I have done some calculations on U.S. prices of bread, housing, oil, etc. as well.
Today let's look at a chart of the Case-Shiller Housing Index priced in gold, courtesy of longtime correspondent Harun I.
Click on the chart to open a larger image in a new browser window.
Harun's comments are worth studying. Selling housing at the top and buying gold would have enabled the speculator to buy back his/her house at 1985 valuations. Alternatively, an equal investment in gold in 2005 would have served as a hedge to the huge loss of housing value as the bubble popped.
The Case-Shiller Index tracks the resale prices of homes, and is widely considered to be the most accurate metric of house prices. Median or average prices can be heavily skewed by a small number of outlier homes (very costly or very cheap), and they do not reflect the dynamics of the housing market as well as resale prices.
In broad terms, the ratio of the Case-Shiller Index and gold can be understood as "housing priced in gold." We can see that the current ratio is around 110, which aligns almost perfectly with the second chart, which prices the median home in gold going back to 1970.
On Harun's chart, we can see the ebb and flow of both housing and gold. A mini-bubble boosted housing prices dramatically in the late 1980s as the last of the Baby Boom bought homes. (The Baby Boom is typically considered the generation born between 1946 and 1964, but many dispute these dates.) Those born in 1960, for example, reached their peak home buying years of 25-30 in 1985-1990.
Gold declined modestly in price in that era, so the ratio moved smartly as housing jumped.
In the 1990s tech/dot-com stock bubble era, housing and gold were both flat, and this is reflected in the ratio's meandering through much of the 1990s. Gold slipped in the late 1990s and housing began a new ascent as the dot-com capital gains and low interest rates began to move real estate markets.
As housing prices climbed from 1997 to 2001, gold went nowhere, so the ratio more than doubled. Put another way, housing greatly outperformed gold.
As the dot-com bubble burst, housing increased its attractiveness as a speculation and gold began its ascent. As a result, the ratio stayed flat in 2001-2004 as both gold and housing rose together. The housing bubble's last sprint to the peak in 2006 puched the ratio up to 500: it took 500 ounces of gold in 2006 to "buy a share" of the Case-Shiller Housing Index.
In terms of the median price, it took almost 600 ounces of gold to buy the median priced house in 2005.
Then housing collapsed, and gold rocketed from $500/oz to $1,500/oz. As a result of housing declining by 40% and gold tripling, the ratio has plummeted by 80%, from 500 to just above 100.
How low can the ratio go? Some might look at the second chart and conclude that the previous bottom around 90, in 1980 when gold shot up to $800/oz, might well mark a bottom in the ratio.
Those who believe that 90 is the bottom would then sell their gold and buy housing at that point. Since the ratio is currently at 110, that point is still a ways off.
I am not so sure, as there is plentiful evidence that we are entering an unprecedented era. The Baby Boom numbers about 65 million, and the generation behind them (Gen X) is considerably smaller (45 million). That suggests there won't be enough buyers to buy all the houses sold as Boomers downsize/retire.
As the U.S. economy grinds toward its event horizon, the generations behind the Boomers are less wealthy--their wages have stagnated, and they will inherit less wealth as assets in general fail to keep pace with inflation (i.e. loss of purchasing power).
If you examine the data in this list of median home prices, by state, in nominal and adjusted prices from the U.S. Census Bureau, you will note a gigantic jump in housing prices between 1970 and 1980. This coincides with the brutal inflation of that era and the first wave of Boomers buying homes.
In broad brush, this data suggests that housing has retraced back to around 1990 valuations when priced in constant/adjusted dollars. Priced in gold, it has retraced to the early 1980s, but I think it likely that the generational retrace could eventually fall all the way back to 1970 prices in constant dollars.
That suggests housing could fall quite a bit further in markets which retained the huge gains logged in the 1970-1980 period.
Meanwhile, at least one respected analyst has set a target for gold of $5,200. Louise Yamada called the turn in gold in 2000-2001, and set a target of $1,500/oz years ago. Thus her technical targets should not be dismissed out of hand.
Yamada has also called for a turn in interest rates/the bond market. The Federal Reserve has kept interest rates at historic lows for years, but cycles cannot be eliminated, they can only be extended. So once the 30-year cycle of falling rates reverses into an era of rising rates, housing will come under a pressure it hasn't experienced in two generations: price compression from rising mortgage rates.
Simply put, the $300,000 home at 5% mortgage rates will decline to $150,000 if mortgage rates double to 10%. The average household can only afford so much per month for a mortgage. If rates double, then the sum of the mortgage has to fall by half to be affordable.
Yes, there are cash buyers, but if central banks around the world have to stop printing trillions in free money to rein in rising inflation, then the flood of free cash looking for a quick return will dry up very quickly.
We might also ask what happens to speculation in rising home prices if interest rates start rising. If cash buyers are counting on hefty returns from rental income, then we have to ask what might happen to rents.
Even if housing stays at current prices, if gold triples to $4,500 an ounce, then the housing-gold ratio would fall to the 30s: $160,000 divided by $4,500 = 35.
If housing declines another 25% to a median of $120,000, then it would take a mere 27 ounces of gold to buy a median-priced house.
There are certainly good arguments (usually based on replacement costs) that housing can't possibly fall much lower, but oversupply and higher costs of money may well combine to push the speculative value of housing to new lows.
This is all speculation and guesswork, of course. All we can do is look at trends and study history for clues about what might happen. What will happen is unknown.
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Just don't get a mortgage. 30 year rape contract.
You think it's bad now, just wait until they pull the rug out from underneath homeowners and get rid of the mortgage interest tax deduction.
wait till the interest rate swap market explodes and every fixed rate instrument immediately goes variable at inflation & fed balance sheet contraction affected rates.
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TPOG
This is so dumb. Housing is overpriced. Gold is overpriced.
How about Gold in terms of Silver, or Silver in terms of Gold?
These analysis means very little. Except that Gold is overvalued and Houses are overvalued.
Overpriced in terms of what? Inflating fiat?
You've got to measure in terms of something. Gold and Land are the two most stable measures out there. . .
You think gold is overpriced now... wait until you see what happens when the world central banks start trading their ever-deteriorating USD for whatever gold they can get their hands.
The price you see now is a price based on expected price movements of a paper market. What will happen when the paper market melts down as the ability to own gold becomes more important than the ability to trade a contract reflecting an artificial price of gold?
Exactly, this is what Soros means when he said Gold is the ultimate bubble. When/if the scramble for gold hits its full stride, then you'll be able to buy significant amounts of land/other assets with your physical metal. But leave it to TV to inform the public that Soros meant gold is in a bubble today....
Then economics mean very little. It is the study of how much of x is equivalent in value to y. Its dumb, but has profound bearing on everyone's agency and wellbeing. Wars have been waged over things that meant as little or less.
far, far less: he tried to kill my daddy; throwing two catholics into a pile of manure; the assassination of an archduke.
don't forget saying the u.s. wouldn't defend south korea and keeping dominoes from falling.
When the dollar declines dramatically over next decade due to high inflation (or possible currency collapse), those with 30 yr fixed might make out like bandits.
That's the entire [unstated] goal of the Fed. Repudiate the debt, bitchez!
You might want to study up on the Weimar Republic, and how they handled the "30 yr fixed" stuff...
Agree, if your view is hyperinflation and money becoming worthless, you should buy real asset and preferably leverage as much as you can, your $2,000 montyly payment in 10 years will be same as buying gum, so tax deduction or not you should take that fixed mortgage. Of course if deflations happens then u r screwed.
You might want to study up on the Weimar Republic, and how they handled the "30 yr fixed" stuff...
gofigure, care to give us a hint on where to start?
imo go refers to the requirement that at least some fixed contracts be paid in gold marks during the institution of the rentenmark (the one that stabilized the highly depreciated prior mark). however many, many fixed contracts were rendered worthless during the hyperinflation: http://www.usagold.com/germannightmare.html
If they try to renege on a deal, then step out and tell them to fuck off. It takes at least two to have a contract.
Yes, but only if the i-rate is fixed AND only if they have enough currency to survive the inflation.
30 year? Shit, I was hoping for a 45 year mortgage. It's the only way I can afford my McMansion. It's my God Given Right to buy the biggest house possible. It's in the constitution. Look that shit up bitchez.
That made me laugh out loud. LOL
No we still have a long way to go in both markets in opposite directions...
http://dont-tread-on.me/the-3-big-charts-i-watch-for-silver/
Alcoholic Nativ
"Just don't get a mortgage. 30 year rape contract."
Really? If you, like many on this site perhaps, think inflation immenent then why would you think a 4.5% 30 year fixed rate mortgage, fully tax deductable even if you pay AMT is bad?
You may want to recind your statement.
Having debt during high inflation may be good in a nominal sense, that is, the inflation puts the lender under water... but having ANY debt in a high inflation is a terrible thing, because you'll be fucking broke from your terribly expensive cost of living, which makes it harder to meet loan repayments, even if they are less nominally.
No
Agree, now is not the time to trade gold for a home as home prices still have ~10% or more to fall PLUS the very high carrying costs of property tax. As many in the USA know, your home fell nearly 15% yet your yearly tax bill has actually gone up 10%. This means you getting gouged over 25% more in taxes on your devaluating 'investment'. Of course gold has zero carrying cost or cost to maintain while a home has a variety of costs from taxes to insurance and upkeep.
Tax bill on my properties is down 22% YoY. Have not figured out the catch yet, but I will take it.
Bon Jovi pays 100 dollars a year on taxes because his 30 room mansion is a farm.
Which is probably why gov don't want people raising chickens or growing food at home.
$100/yr? Is this hyperbole?
I've got a modest home (below average?) and a fair amount of land, land that's classed as Ag, and I still pay a fair amount (much more than $100/yr!), though a LOT less than those without Ag zoning.
I'd think that it's more of an issue with the commercial food producers than it is with govt (though the two are nearly indistinguishable).
No it's not hyperoble.
http://topics.dallasnews.com/article/03Pa0LubDf7Z8?q=Bon+Jovi
Market Truth,
"Agree, now is not the time to trade gold for a home as home prices still have ~10% or more to fall PLUS the very high carrying costs of property tax. As many in the USA know, your home fell nearly 15% yet your yearly tax bill has actually gone up 10%. This means you getting gouged over 25% more in taxes on your devaluating 'investment'. Of course gold has zero carrying cost or cost to maintain while a home has a variety of costs from taxes to insurance and upkeep."
I think you're way better off buying an investment property right now, I should know as I own several. Rents are through the roof and carry cost is hugly lower then it was 5, 10, 15 years ago. We've gone up on our rents so much so that our cash flows grossly out strip deflationary pressures as well as static tax implications.
Here's a better idea, own both!
The correct answer: Not yet. But in due time gold will shoot way up and housing will go way down and then will be the time to buy buy buy. But no blood runnin in them streets yet.
Agreed - values will continue to head down. I'm planning on waiting until the QE pestilance has run its course and a currancy/inflationary panic has set in - then I'm going to be trading some ounces on a nice homestead somewhere.
exactly, according to the devils who made themselves wealthy beyond any normal person's mental comprehension: ''when there's blood in the streets, buy property''
that being said, i wish I had the funds for a villa in spain
When 5 ozs gets me Miami condo I'll sell... maybe.
what else are you going to do with your gold? eat it?
We're eventually headed to the 30's. That's been my call for two years now. 30 ounces of gold will buy you a 150K house (and a nice one too) before this is all over.
At minumum. Take into account Gold is getting scarcer and more difficult to mine and housing is plentiful and using cheaper and cheaper materials.
And you will buy it from the Fed when they become the buyer of last resort in the national post foreclosure era.
umm...I hope you're meaning post-collapse prices for the house? 'cuz I don't know where y'all live that 150K gets you a nice house, or even a whole one.
the only question that matters is "are we going to see another housing bubble?"
That is what caused the inflection in the ratio in the 80s.
can you not find a more sophisticated avatar?
I like his avatar. It's subtle and fits his character to a tee
are you brain dead travis, or do you work for GS?
of course we (depending on how old you are, but I suspect you havnt been around more than 3 decades) will see another housing bubble.
but if you keep playing the ratios, bubbles are just ways to multiply your wealth....
ah, I get it....your mad you weren't born under the rothschild shield....
oil supply hadn't peaked until 2008. 2005 for C&C. Things are different now and shit is not cyclical merely because it has been.
At the rsk of stating the obvious, RE as an investment or hedge is complicated so do your homework. It's should be treated like a business, not a carry trade.
I prefer dow/gold because housing/gold is so hard to read right now. But I look to at least 55/75 oz to the house given todays conditions. With homes plummeting the way they are and gold in the perfect setup we could see some historic and insane ratios. JHMO
Dow/Gold will hit parity before it's all over.
My thoughts exactly 1:1 and Ill cash in. Im glad some people are starting to value metals in something besides 2 ply fiat which is pretty meaningless.
Mike Maloney thinks so, and he tends to get shit right.
I'd like to see Dow/Silver parity.
You'll see it and Gold Silver parity too. Amazing times ahead, just thrilled to be on board.
My analysis tells me that gold/silver/dow triple parity is going to occur in less then 5 years.
Inclined to share said analysis MoB?
cowdiddly, expand more on what you conceive those historic and insane ratios could be.
Priced in gold. is housing a buy?
A great thing to consider...if you've been sitting on gold for five or ten years.
There are certainly good arguments (usually based on replacement costs) that housing can't possibly fall much lower, but oversupply and higher costs of money may well combine to push the speculative value of housing to new lows.
The real wild card is cost of carry, especially property taxes. Municipalities are hurting right now and there is no telling what the upper limit is on that future liability.
==> The real wild card is cost of carry ...
Real estate throws off rents (income). Gold doesn't. At some point, I'm making the trade. But ... not ... quite ... yet.
Buying property that will be taxed to the brink to fund endless public sector entitlements is insane.
so where does one live?? Under a bridge? Do you think those high property taxes paid by landlords will not be passed on to the renters?
Exactly how does this work if your not a slumlord, and just trying to keep the farm?
I think most landlords will walk away from properties when the tax burden is too high and tenants unable to pay higher rents.This is not a new phenomenon.At that point you could squat there.So wait til housing is basically free, then dip your toe into the housing market.
that is what happened in Detroilet when the population destroyed the city's function. People walked away. There are tons of units there owing massive back taxes
Methman and the rest already live under the bridges. I suggest a farm- they really provide a lot of tax breaks and the rates are minimal to begin with.
You can never own a home in America anyway- you just get to rent it from the government.
You could build an offgrid home on a farm. This may allow you to only pay taxes on the land. If the house was not built to code, it could be impossible to value. By the way, you can build a very efficient, safe, non code home. Won't be able to sell it as a home, but people will probably still give you the value if they desire the same benefits.
Homes should never have gotten to the excessive point that they did. Pure hubris!
Modesty... I settled for a modest home (under average?) on Ag land. It is home to me, and one day I hope for it to provide all my income, something that one is hard pressed to do with a "condo" or other cage...
I opted to save my PMs for another day, plunk down a sizable amount of fiat and then borrow fiat at a low interest rate. This allowed me to get "in," unload a bunch of fiat (still have some fiat for assets, like a tractor) and hold PMs until I'm ready to pay off the balance of the loan (or hold for emergencies).
Sold my previous house at the top of the market. Bought this one on the low side, with interest rates at the bottom. I view my current home as an investment in life, not for speculation.
That's my preference: I prefer land, land, and a little more land, and I'll build my own house, thank you very much!
http://www.earthbagbuilding.com/
I'm under 30, and a lot of people my age and especially those even younger are realizing that this insane idea that a house is an "investment" is just that---an insane modern invention. Houses are places to live. If you want cash-flow from a house, then rent it out--to someone like me who says "houses are places to live." I think/hope the future trend of homes will be much more in-tune to these expectations: namely, smaller, lower-maintanence, and more energy-effecient.
Depending on your location, you might consider straw bale as well. Foremost for me, it is an issue of health. The modern home is toxic. Most building materials offgas poisons. Unfortunately, building codes require many of these materials. The new electrical code is a boon to suppliers of copper wire and circuit breakers.
Earthbags have some great qualities as well. For those worried about tornadoes, earthbags make a good circular home- which is almost impossible to destroy. Their insulation values are not as efficient as straw bale, but their cost is mainly labor- especially if you consider digging a cellar to provide material.
Consider humanure systems. That really grosses most people out, but we are poisoning out groundwater systems and wasting fresh water. Septic lines should be run in the top 12" of the soil, so that the micro-organisms that populate it can breakdown the wastes. Run it by an orchard to provide nutrients for the trees. "Night Soil" has a long tradition in farming.
If you study global building systems, there are many interesting and inexpensive ideas just waiting to be considered or modified. Good luck Keri.
Meh my pay didnt go up inline with gold so this valuation measure is relatively useless.
Judas, Jesus Christ and the 30 pieces of silver According to theProfessional Coin Grading Service, “The value of 30 of these coins was significant at the time. Such a sum likely would have purchased a small farm. Quite a bribe for the time…” On average, a Small farm goes for around $240,000 in our country today . . . which would consist of the farmhouse for the farmer and the family, barns, equipment, along with 120 acres on which to plant and harvest crops. To put it in terms most people can understand, $240,000 would buy:
some math on this,
13.73 grams each Shekel x 30 = 411.9 grams of silver.
28.350 grams in one ounce. So divide 411.9 grams by 28.350
= 14.53 oz's of silver.
Divide $240,000 (estimated value today of 30 Shekels in 33AD) by 14.53 oz = $16,517 oz.!!
$16,517 an ounce - todays inflation adjusted valuation of silver 33AD.
Just goes to show - would have been a lot wiser for the long-term investor (2000 years or so) to convert the silver (even before it was demoted to industrial metal status) into productive capacity. How much farmland are you buying today for 14.53 ounces of silver?
Except that a farm house back then was a tiny shack worth maybe $5000 today and farm equipment was a mule and a plow.
Not true. A denarius back then was worth about $21 in terms of purchasing power of bread and food. It was also a day's pay for a legionnaire.
Shekels were actually considered to be worth 4 denarii.
30 shekels = 120 denarii ~ $2520.
Judas worked cheap.
Better check your numbers. 120 acres, a home, barns and equipment would never sell for 240,000 dollars. Maybe love canal, but most farm land sells for 3-6,000 an acre- raw land only. There are places where you can get good land for 2,000 an acre, but it is still raw. There might be a usable barn.
Single family homes are too heterogeneous to form broad conclusions. But, this simple trend analysis supports the idea that RE is becoming relatively cheap. I wouldn't sell RE at this point and would be on the lookout for buying opportunities in the near term. The nice thing is that you don't have to pay for a house with gold; you can still use FRNs!
It won't matter before too long. Pretty soon commrade Ben will own all personal property on the fed's balance sheet.
Interesting (but somewhat expected) observations. Could you do the same thing for the Russian housing market from 1975-2005? That is where we are heading.
"Simply put, the $300,000 home at 5% mortgage rates will decline to $150,000 if mortgage rates double to 10%. The average household can only afford so much per month for a mortgage. If rates double, then the sum of the mortgage has to fall by half to be affordable."
this is said a lot but has no truth behind it.. what is "affordable" anyway in this zero down world?
This conjecture would only be true if you were being paid in gold or did in fact have all your savings in gold (or anticipate the releveraging of the entire housing complex). If I'm being paid in fiat money then the house value must be priced in fiat money terms. Nice exercise but pretty worthless.
not so worthless if one is holding more than a few oz's of gold and wondering when, and for what, they will exchange them.
The only thing worthless in above's exercise was the mention of "hedging house value decline with gold".
The people in need to hedge their house value don't have the money to buy gold, and vice versa.
As the dollar falls gold will climb and climb and climb. As local governments add more and more taxes, rules, and regulations onto the backs of homeowners home will fall, fall, fall. DO you see any change in that trend?
Okay, keep extending your hypothesis out over time. Not sustainable. Again, you identify the problem, now what is the solution?
Buying more gold? ;o)
always.
Get rid of government. Easy solution.
Until the ''government'' doesnt have the funds to pay a ''person'' to come and kick you out of your house for not paying your taxes
When they can't employ police to kick householders out for back taxes, they will just sell/auction the tax deed at a discount, and the buyer will either have to pay some government mercenary or kick them out himself.
Real estate still has a long way to plunge, but if people feel like buying a house, go ahead.
There's RE and then there's farm land. I doubt that farm land is going to fall much further; I suspect that those with money are buying it up. But, if you're talking stuff like condos, then yes, they'll end up being next to worthless.
Thank you for the insight Lawrence Yun.
More economic modeling based on fantasy. Everything gets thrown out the window when people change their definitions of "value" and "money". Right now we are not paid in gold - nice try though. Taking it to the extreme, having defensible arable land and like-minded ( and well armed) neighbors is worth a lot more than gold in Pakistan already. So long as fraud is the status quo, don't think that the whole world won't go this way.
Gold equals value! You can convert it to Money at any bank or coin shop! Defensible arable land? You have been in the outback too long!
Having some farmland makes sense now and long term. Defensible does not exist anymore though. In fact, visable buildings or groundworks approaching defensible will get you attacked by governments most places. Building underground might approach defensible in a few locations, especially if not visable from above and built before photo surveillance.
As an inflation hedge, I'll side with xau. If you look at inflation adjusted post war (WWII) equity in real estate, it is clear real estate is meant to live in. Sure there are spikes at times, but the downside (risk) is extreme if you're trying to pick tops and bottoms. XAU is liquid, and a better risk!
Watching for the decoupling of strong dollar / weak dollar from Gold / Silver / Commodities (or the coupling of equities w/ gold / silver prices...all up or all down).
Looks like the strong dollar meme (vis-a-vis scary Euro / JPY) simply isn't holding water. Stores of liquid wealth (gold, silver, oil, etc) are making very nice moves in the face of dollar strengthening (and equity weakening)...looks like this could be the coming out party for the new reserve currency, gold / silver.
Could break down as overleveraged sell strength to raise cash but seems no one willing to sell the new crown jewel for fiat...could be the beginning of the formal end for dolleur?
historically from what i have read..
30oz of gold was the value of a nice house with land.
however we've over the last 40 years with suburbanization have redefined that statement and drifted far far away from that statement original paradigm of thought mostly in the coastal regions of the us.
Good point. Thanks for the reminder. Inflation in the coastal U.S. cities out of control.
Another tidbit. When property values are high, interest rates on the long end tend to be higher. Gold is priced in usd so the net gain in(real estate) equity is wiped out over time.
Inflation. The west coast real estate market, for the most part is looking at 5-10 years before realizing any inflation adjusted equity. Sure there are pockets of stability, but the building that went on from 2000-2006 was out of control. Not to mention all of the Dark inventory, that banks are hoarding.
YC, you're lucid again! Thought you had a troll mind-meld...
Jet Lag. Have a nice weekend. We should have some interesting gaps on the Sunday open. Lots of news going into the weekend. Any thoughts? I always appreciate your input.
Aps. for x2 post. Got error message.
30 ounces of gold for a decent house sounds about right. If gold traded in a free market and went to $5-10K, as many say, then it's about right. Especially as the slow motion popping of the housing bubble is allowed to lose air and deflate.
I don't see any serious analysts revising their 5-10 year gold price estimates downward.
I knocked up the same chart for the UK a couple of weeks ago...
http://www.goldmadesimplenews.com/gold/as-uk-home-prices-fall-again-intr...
look how those ratios compare!
Massive housing inventory, ending the mortgage interest deduction, rising property taxes, along with the expected higher borrowing rates will absolutely kill housing.
I don't even see where people will get the money to pay higher rent to landlords to keep up with inflation, either.
The difference between the 1970's and today is that wages rose with inflation back then and they're not going to do that this time around because of cheap overseas labor. This time around our standard of living is going to go down with each upward tick of inflation.
It's already been said that America could become the world's first de-developed nation. Vote wisely in 2012.
I don't see the property taxes rates continuing to be increased significantly. It's to the point that the tax payers will revolt. They will vote out the bums that raised property taxes to fund overpaid union government employees and replace them with better stewards of taxpayer money.
Taxpayer revolt will work where it can have effect, other places will become ghost towns or disincorporate. Some municipalities, the remaining local employees are mostly volunteer or part time, but property taxes increase to pay for federal, state, county and school district mandates that local voters cannot control. Meanwhile paved roads go to dirt, recreation departments are closed, libraries go to three days`per week, 30 year old fire trucks are not replaced. Here property values have dropped 30%. assesed values are the same, and property taxes are up 10% despite massive local cuts. I give the municipality five years max before it folds.
Portions of it have already been so for decades now --- ever visit Detroit?
As much as so many people like to joke about Detroit, the grim third-world reality would strike most Americans who have never been there like a sledgehammer blow to the head.
I was born (in a log cabin I built myself) in Detroit. Glad I left about 53 years ago..
Reincarnation rocks :-)
Don't catch a falling knife.
A buy? For anybody who was 100% vested in AU 10 years ago!
Then maybe.
We still have a long way to go, AU up, housing down. I'd wait on any real estate investment until energy prices forces the jobs back to the US. Rental property is no good if no one can can support your dream of cash-flow in an environment with ballistic unemployment and wounded credit.
Besides, who would want to buy an asset that will continue to be losing value for the next x years when capital is flowing to the Golems precious.
Housing will be priced in Silver ounces, not gold. The new copper money will get you a first class hooker. Gold is only for the "elite" vaults, dontcha know.
that sounds very nice for me....
i found a nice copper tube that would be a great barter for one, two or three of those super-models turned personal hooker/trophy wife.
I can't stand seeing banksters with hotties. soon holders of ''the gentleman's'' money will have hoardes of followers.
ah, the wonders of AG....its so beautiful, but it buys even more beauty!
Honestly, I think some of this stuff is insanity. Housing is about supply/demand (and ability to demand i.e. financing and having jobs/income not just willingness). Housing will be a buy when supply/demand is in balance without games/intervention at levels incomes can carry. Actually it will be a buy if it overshoots to the downside as you can capture mean reversion, otherwise there's nothing special. And no we aren't close yet.
This isn't rocket science and we don't need a divining rod. If you understand the fundamental levers and drivers of supply/demand you don't need to do exotic relationships between assets and try pricing in Netflix stock or pre-IPO private market Facebook valuation multiples.
I'll be tempted to dip my toe in the RE water...AFTER I see just how desperate the Baby Boomers are going to be when they start trying to sell their homes to escape escalating property taxes when they retire.
I predict they will do far more damage panic-selling into existing weakness then the drop we've seen so far from the bubble popping.
Buy it ( real estate)when rates are super high. Pay cash (for it) and rent it!
ding. ding. ding. We have a winner. Only deviation I'd suggest is buy 4 houses at ultra high rates w/ 25% down (or whatever it takes to be cash flow neutral on the rental) and wait for lower rates to re-fi the loan.
Principle isn't usually renegotiated but rates sure can go down from the top...
Then we can have a little ATM factory? The bank will want cash flow positive. Probably 15% @ least, with a market environment like that.
Cash flow positive it is. I'm ok w/ that.
Bought rentals in late 90's, early '00's and worked this strategy pretty well. Still, so many variables in play it's really hard to project if leverage (responsibly) will once again be your friend or buy things outright and take the sure return.
I can only imagine how will this all end...and restart?
Housing went from 50 dollars a square foot in the 70's to 35 dollars a square foot in the 80's due to power tools improvements and the fact that the houses just fucking sucked.
With all these ridiculous asset vs. gold ratios I am still wondering why nobody ever made a Dow vs. lean hogs or Nasdaq vs. cocoa or what about US GDP vs. corn?
Should yield equally great insights!
How about goose livers vs, gold ratio's?
In other news, we now live in a police state:
http://www.newschannel5.com/story/14643085/police-profiting-off-drug-trade
http://www.komonews.com/news/local/112097619.html
http://azstarnet.com/news/local/crime/article_d7d979d4-f4fb-5603-af76-0b...
http://smargus.com/indiana-sheriff-if-we-need-to-conduct-random-house-to...
What history has to say about men with guns holding up the public purse: http://www.martinarmstrong.org/files/What%20Destroyed%20Rome%2005-18-201...
Lol buck, just figuring that out now?
sorry forgot to include the
/sarc on /sarc off
tags
Shorting this market is near impossible.
The only "guaranteed profit" to make money on the short side is to short gold stocks when General Jim starts screeching "This Is It!!!".
However, even though that trade is usually good for a 30% - 45% gain in some junior equities, the trade must be closed within weeks, otherwise you can give up your gains.
Amazing how the market simply shakes off everything.
Why the fuck would you buy a house with that much gold? My ex-girlfriend's dad's a contractor -- He'd build a 240k house for 60k and sell them hand over fist month after month after month before the bubble burst.
It makes 0 sense (opinion here) to pay 166k for something that only costs 50k to build.
Wasteful if you ask me. Hire a professional contractor who knows his shit and get a discount. The materials are shite anyway, not like you're going to get a solid house because you're forking over your lifes savings.
Hell, it's even better to just buy land then drop a modular home on it. >30k (minus the land) and you're set. You can even expand on that too. If you wanna go hard core gridless luxury you might spejnd more than 30k, but at that price just buy 10 freight cars and weld them together.
Who the FUCK wants another cookie cutter home anyway? If you're going at it for rental income I get that, but when housing drops another (roughly 13% or so) you'll be able to generate $1.22 of rental income for every $1 invested into the property itself. So, yeah.
Measure it in whenever you want, but it makes no sense to talk RE right now until the parity between cost and rental revenue is wide enough to make sense to drop physical gold on it.
Your post is a definite keeper! Printing it off as I post. Nice work! Just use the gold to finance the project. Win Win!
x...
dupe
This is not a bad analysis. If you are sitting comfortably on a mound of cash, it's PMs or Property. A bit of both to diversify your risks and returns is a strategy to consider (Depending where you live). While waiting for the housing market to bottom out further is just fine, if you buy-to-let (with cash, especially in a busy metropolis), the returns from collecting rent could be going towards buying more PMs.
I don't think being a landlord is for everyone, but with the right property portfolio, you could get quite a bit ahead of the game in collecting assets that mature well with time as you buy more PMs with the proceeds.
Edit: Some people still don't seem to get it. The whole point is not to have any cash in your account. PUT IT TO USE so it can have VALUE instead.
People are forgetting the wealth is no longer really in the US. There is no comparative comparison with home prices in the 1970's and 1980's (possibly the golden years of US history) - you can buy the median residence in Egypt for probably 10-12 ozs of gold because their economy is weak.
Ratios are only good with a decent comparison...
You are right on. If real interest rates were to climb to 10% or more real estate would die instantly and gold would tank. It happened in 1983. I wonder about 50 caliber ammo as an investment?
I am usually a big fan of Smith, but this time he made a hard bunt to the first baseman. RE is a four year old deflationary popped bubble with plenty of room to fall more. PM and risk assets are just peaking for the ride down. Buying a house now with debt, or even with cash, is to catch a falling knife with your bare hands. There are no safe harbors for sure, but I think the way to go right now is cash or cash equivalents and rent.
This post misses some key analytical points, average wages, money supply and debt. This post considers affordability based upon ounces of gold. Yes of course on a nominal scale we are back to nearly 1980 price levels, however lets look at the following wages on an inflation adjusted basis for the middle class maybe grew by 30%, not enough to exert upward demand price increase to the levels that we still see today, but the biggest key I think is of course the large increase in money supply and even more so, in debt levels. the debt to gold ratio in 1979 was $1.5m (US debt/price of gold) even with the increase in gold in 2010 that same ratio is now $9.6m or an increase of 640%, now of couse more money means higher prices, but as you know, more interest as well, which is the real reason new debt will always have to be created, which in turn means that more capital has to be put to work to just service debt, and that reason in of itself is why housing will not find a bottom, more capital and resources have to be put toward debt service and not into sustainable production, nor sustainable housing. We have tipped that crucial point by which our Federal Reserve has sold everyone out for the benefit of the very few, what you will have is houses in the millions and then the rest of everyone else, as income disparity continues to widen, the real bubble is in debt. Which we all know where that leads...I'd rather hold my gold than put it into housing, even at these over inflated levels...thats housing (still inflated) I'm talking about, not gold.
Hey guys, nobody is talking about the tax consequences of buying a house with Au or Ag. The gov does not look at it as if the dollar went down and your metal held its value. they look at as if your metal appreciated and they want a cut on every dollar your made from that appreciation. So do all the states, with the exception of Utah. (at least so far). If you factor that in, then all this ounces for property nonsense goes away, or at least comes out with really different numbers.
but, if gold and silver is money, what then?
So you think in Utah you don't have to pay capital gains tax when selling your gold?
LOL
paying taxes on PM gains is bullshit. there's got to be a way around it.
You sir, are very clueless.
sorry, dup
Thanks, as always Charles Hugh Smith , very interesting reading.
Interesting and can be put in another perspective.
If a gold standard is accepted at this moment, how much gold is there in for example the US, total by banks, investors and jewelry. What is there that has to get paid by gold(backed) currency? Every transaction! And also anything that allready existed has to get a relation to gold
Even your toilet seat then has a been waged to gold, when you buy one at the mall it can be paid by a microscopic piece of gold so goldbacked paper and coin is going to come in handy. Speaking of coin, maybe silver?
There is no way transactions are going to be paid in physical gold except big transactions, and on the street maybe silver will be nice, directly taking a cut in the industrial value. Just keep whatever you own physical and is rare.
GDP to physical gold?
Total assets in a country/continent to physical gold? A house changing hands for a couple of gold eagles? Whether i'm rong or right I'm keeping the metals
Todays dimension is screwed up
This is so ridiculous: those advocating silver/gold as coin that may be carried around and used for "money" as was done in the old days, some kinda miasmic heaven they seem to believe ever existed, are full of (and probably holding) lots of mining stocks.
Gold and silver have never been used as common money: ever. In the time when gold and silver were "coin", almost all transactions were in the form of some kind of barter. These coins were used only to pay for certain things, and very small number of transactions were done this way. Over all, most of the world during this time was a subsistence world, so the arguments for gold and silver coin are absolutely hilarious, since these people obviously know little of historical "monetary" transactions.
Nothing can replace paper money, which serves as a contract regarding the value of labor. If we have lost value for our paper dollar it is because we have allowed Chinese slave labor to eradicate the cost of labor in our products, at least until that Chinese system collapses, which is obvious, the amount of natural resources that have been scoured in order to fill our landfills is unprecedented and not sustainable.
As to moi, I am finding more and more products in the stores that say "Made in El Salvador", et al. Hmmmm....Tell China to kiss my grits. And then let's charge them double for anything they want from us, and end their right to own Anything in the United States.
Gold and silver have never been used as common money: ever.
Well, discounting the history of USA until about 1964, when silver coinage was the rule. And ignoring the Greek and Roman empires. And uh...well pretty much every society ever more than about 100 years ago.
Wow, you're incredibly full of shit.
Not yet. Wait for 80 to 100.
I'll buy a house for 1 or 2 ounces of gold... here's why:
1) I can just hold gold, it's money, harder to sell a house.
2) Everyone is broke, city, county, state, fed; all want money: easiest target-> property owners... cause they're fixed to the land.
3) Cost to maintain; even if you rent it, you have to fix it, improve it, maintain it. That means money, time, effort. Gold don't need nothing except time.
4) Property is tied to the location; I can buy a house now in Detroit for $1,500; but
I'd be tied to Detroit and it's economic plight; Where in the US will the economics be growing to allow me to feed myself while living and paying taxes in my new home?
5) Demographics; after the baby boomers die, nobody is going to replace them; at least not until we finish another great war. Even the echo-boom generation is smaller. All we can do is import illegals, and they send most of their money home.
I agree. The cards have not been played, it'd be reckless to tie yourself down to a geographical position.
The median house of 2011 is bigger, with a different configuration of space and utility than the median house of 1980. It is hard to account for this difference, but a better metric might be oz AU / Sq ft.
Median or average prices can be heavily skewed by a small number of outlier homes (very costly or very cheap), and they do not reflect the dynamics of the housing market as well as resale prices.
Where to start? By "median or average prices", is the author suggesting that "median" and "average" are synonymous? If so, they are making a serious error. The average is the mean, which is quite a different thing from the median.
Medians are not heavily skewed by outlier values. In fact, this is often why the median is chosen over the mean, even though the mean is easier to work with. Simple example: Let's say the median was $200,000, and the highest value was $1,000,000. Okay, fine, let's change that highest value to be a really serious outlier, say $1,000,000,000. What is the median now? $200,000.
This is basic, basic stuff, and anyone writing serious articles citing Case-Shiller data should understand it. Read the Wikipedia article on "median". Go there and search for the term "outlier".
When you buy into housing you also buy into local and state liabilities.
At this point in time anybody buying into CA is insane, "homeownership" is a myth and merely a totally subjective and arbitrary state taxation point.
Homeownership is for chumps, saving and investing is for chumps, chumps will get slaughtered, investors and savers will get creamed.
I liked your first few lines before the descent into chumptalk.
Its worth remembering that land taxes leave you vulnerable.
But also worth remembering that land is wealth and always has been, like gold.
Taxes are the price of doing business and accountants are there to take tax out of the equation
location location location