Guest Post: Priced In Gold, Is Housing A Buy?

Tyler Durden's picture

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.

The calculation is easy: last report median home price of $166,000 divided by price of gold $1,500 per ounce = 110.

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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Alcoholic Native American's picture

Just don't get a mortgage.  30 year rape contract.

redpill's picture

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.

narnia's picture

wait till the interest rate swap market explodes and every fixed rate instrument immediately goes variable at inflation & fed balance sheet contraction affected rates.

That Peak Oil Guy's picture

OT, folks, but important.  Our wonderful politicians are working to extend the Patriot Act for another four years.  Please take a few minutes at the below link to tell them what you think of this.  It only takes a moment to get the message to all of your reps.  I know it may not matter, but we can't just sit around and do nothing about this.


What does it all mean's picture

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.

Citxmech's picture

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. . .

Alpha Monkey's picture

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?




zaphod's picture

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....

Aquiloaster's picture

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.

jeff montanye's picture

far, far less: he tried to kill my daddy; throwing two catholics into a pile of manure; the assassination of an archduke.

jeff montanye's picture

don't forget saying the u.s. wouldn't defend south korea and keeping dominoes from falling.

DavidJ's picture

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.

Joeman34's picture

That's the entire [unstated] goal of the Fed.  Repudiate the debt, bitchez!

gofigure's picture

You might want to study up on the Weimar Republic, and how they handled the "30 yr fixed" stuff...

Hard1's picture

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. 

gofigure's picture

You might want to study up on the Weimar Republic, and how they handled the "30 yr fixed" stuff...

sullymandias's picture

gofigure, care to give us a hint on where to start?

jeff montanye's picture

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:

Calculated_Risk's picture

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.


mayhem_korner's picture

Yes, but only if the i-rate is fixed AND only if they have enough currency to survive the inflation.

Jack Mayoffer's picture

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.

ManOfBliss's picture

That made me laugh out loud. LOL

Tater Salad's picture

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.

ManOfBliss's picture

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.

MarketTruth's picture

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.

LawsofPhysics's picture

Tax bill on my properties is down 22% YoY.  Have not figured out the catch yet, but I will take it.

Hephasteus's picture

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.

Seer's picture

$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).

Tater Salad's picture

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!


LRC Fan's picture

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. 

Citxmech's picture

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.

Captain Planet's picture

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

GeneMarchbanks's picture

When 5 ozs gets me Miami condo I'll sell... maybe.



Captain Planet's picture

what else are you going to do with your gold? eat it?

Glasgow Gary's picture

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.

beastie's picture

At minumum. Take into account Gold is getting scarcer and more difficult to mine and housing is plentiful and using cheaper and cheaper materials.

Whatta's picture

And you will buy it from the Fed when they become the buyer of last resort in the national post foreclosure era.

mayhem_korner's picture

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.

trav7777's picture

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.

Yohimbo's picture

can you not find a more sophisticated avatar?

Sophist Economicus's picture

I like his avatar.  It's subtle and fits his character to a tee

Captain Planet's picture

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....

trav7777's picture

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.

InconvenientCounterParty's picture

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.

cowdiddly's picture

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

LRC Fan's picture

Dow/Gold will hit parity before it's all over. 

cowdiddly's picture

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.