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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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As a gardener, I was interested to see in my little gardening book yesterday a note that peppers were once so valuable they could be used to buy and sell anything. Value is perception. There are no absolutes with value; well maybe one: we value opportunity above all.
A friend recently drove from Az into CA, and was stopped at a "border crossing" and asked where they were headed and if they were Americans, although they did not have to flash their Ids. So: here is the wonderful result of letting some reasonable legal immigration turn into a torrent of trash immigration:
1. The liberals decided that everyone (legal and illegal; productive and unproductive) should own a home and live like a movie star. Of course, the only people who didn't do that were those whose morality had taught them that something ws werong. These people are now holding up the economy because of their stability. None of them live in California.
2. Love your point, SmittyinLa, that "home ownership" is a myth. After all, unless your home is somewhere out in desert land with only cacti for millions of miles, the endless taxes, to pay for those lovely twenty-year-to-retirement govt slob pensions, are hidden within "fees". Marvelous.
3. This is why the welfarians are soo soo happy. They don't have to work; thechecks come every month; they can't be fired!; and walmarts at-least-until-it-breaks cheap chotchkies allow for a semblance that they are "middle class", even though middle class is defined as much by a level of education, finesse, and personal dignity the walmuckians don't even know exists; their "awareness" is somewhere around that which hovers just above "the hills have eyes" and just below/or at the level of jersey shore.
This last week on Judge Judy one of the "defendants" claimed proudly his job at Walmart; ah those twenty hours a week, government slavery handcuffs.
Do we not all recall that it is not the "american way" that we support the non-related, the slovenly, the slothful, those who would blackmail us via "another" baby. Why are there never any discussions about an absolute limit to "compassion"? Compassion is the key word for fleece under the guise of "compassion" the American taxpayer. We were once to smart for that; what happened?
Oh and about that gold stuff, Louise Yamada is clearly a savvy woman and that said, we nonetheless recall that the world's population has more pressing needs than gold, a pretty shiny thing, but an unproductive one. Her prediction of $5200 an ounce implies that desperation and despair are the future. I beg to differ.
As the system (the world/global financial system) reminds itself, painfully though it be, that the jiggering of economies to try and create an arbitrary (arbitrary as, for instance, the European Union is because there is no affinity of race, creed, history, or language to "glue" the union together) "union" only works until the first two-year-old has a fit, gold and silver dance around as though they actually matter. In fact, only natural resources matter in the era we are entering, and the United States is rich in natural resources, as is Africa and Mexico.
For these natural resources, the United States has a strong dollar and shall for as long as thee, me, and our children shall be. Africa is being mugged by China whose 1.3 billion people need water, food, and have seen too many movies of American "tv in the living room and bedroom, two cars in the garage, refrigerator full living". Mexico...ah, the sound of the fiesta music is sweet!...is gearing up to be one of the great powers of the 21st century. While wholly concurring that all immigration to this country should/must/ stop in order for America to survive, one must still give a nod to Mexico for its stupendous (and unheralded) natural resources, the ferocity of its people to work (tempered as they are by heat and hard clay, much like any truly fine steel), and the undeniable allegiance of the Mexican people to their own: their language, their religion (Catholic); their familes; their fight-to-the-last-man allegiance to their own country (regardless of any recent citizenship in this country).
And these are things gold cannot now, nor could it ever, buy. For that reason, gold is not the concern; the concern is the watering down, the decimation of all that binds a country as Pat Buchanan has written of so often; the aforementioned qualities of the Mexicans. We Americans would do well to remember that a jingoistic ferver is absolutely necessary for a country to continue. Otherwise you are eaten away from the edges and from the inside, as is being done with America, until you simply blow into history's dust. God Bless America.
NO.... don't even think that housing has finished declining , it's value is entirely based on the quantum of debt availability and that availability is continuing to tighten. Gold on the other hand is the anti-debt destroyer of fiat bubbles ... this ratio will probably bottom out at circa 20oz/median house ... certainly not 100
The consumer has marked a bottoming in housing...not done but eerily close!
When every Tom, Dick and Harry has resorted to renting as they've thrown in the towel on buying homes, this is a bottom. You buy equity when you see the "whites of their eyes", the same is happening in housing. Everyone, I mean everyone is renting! Bottomish.
As for worries about skyrocketing realestate taxes, doubtful. QE 2.5-3.0 is going to involve the fed purchasing municipal debt.
Illegal now, no worries, this administration is magical with changing laws.
"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".
The plan to downsize cities with falling populations might alter this. Depending on the extent this should ever take place, I wonder if predicting how much housing there will be in the long term is even possible.
How's about trading your Silver for a House?
Scroll down to the headline, "Selling Silver? Why Not Trade It For A House?" on http://www.guidetosilver.com/selling-silver.html
The times they are a changin'! Ahoy!