An Interesting Perspective on House Prices

2010-MAY-06

We all know that house prices in the United States and pretty much everywhere else in the world have been falling for a few years, but less well recognized is that the extent of the decline is masked by inflation. In other words, if the dollar was not being inflated – an insidious practice that causes the dollar to lose purchasing power – the decline in house prices would be even greater. And what is true for the dollar, is also true for other national currencies because all are being inflated to some extent. Only their rate of inflation differs.

What the world’s monetary system is missing is a reliable numéraire. National currencies do not meet this need. There must be some standard against which all goods and services can be measured. Only with this unalterable standard can the price of goods and services be viewed over time to make accurate comparisons, for example, to see whether something overpriced a few years ago – like houses – has become undervalued today.

The good news is that this reliable numéraire exists – it is called gold. The price of every good and service can be expressed in gold as well as any national currency. In fact, it is essential to measure things with gold in order to get a true perspective on prices.

For example, I often look at the price of crude oil in terms of gold as well as financial assets, such as the gold price of the stock market. We can also measure house prices the same way, and in this regard, Chart of the Day has provided the following useful chart. It measures the US median single-family home price in terms of gold. In their words: “It currently takes 153 ounces of gold to buy the median single-family home. This is considerably less that the 601 ounces it took back in 2001. When priced in gold, the median single-family home is down 75% from its 2001 peak and remains well within the confines of its five-year accelerated downtrend.”


Thus, the above chart shows how much less expensive house prices have truly become if measured by world’s numéraire, but Chart of the Day did not carry its analysis to its logical conclusion.

Specifically, gold’s bull market is not yet finished, at least based on the historical experience recorded in this chart. Regardless what happens to the dollar price of houses, their gold price is likely to fall further. In other words, housing prices seem destined to become cheaper, or more to the point, the dollar price of gold looks destined to rise further.

In January 1980, when gold reached its peak in that previous bull market, the median single-family home cost 86 ounces. Although I am not aware of the historical record for housing prices during the Great Depression, it is likely that at its depth, the median single-family home probably cost less than 86 ounces, given the severity of that economic downturn and gold’s heightened purchasing power because of the financial crisis back then caused by widespread bank failures.

Thus, when the median single-family home price falls to less than 100 ounces from today’s 153 ounces, home prices are starting to become good value. And at some point when the median single-family home price is at 90 ounces or 80 ounces and perhaps even less, a house can be purchased at exceptionally good value. At that moment, it will be a good time to spend some gold now being accumulated – i.e., being saved – to buy a house. This observation leads to a more important conclusion, given that gold is money.

Saving money is of course always a good thing, whether to build a nest-egg for a rainy day, funds for your retirement, or to make some future purchase. It is a particularly good thing to save gold while it is undervalued and the item you wish to purchase is overvalued, which brings me back to the importance of gold as the world’s numéraire.

To truly understand the cost of any good or service, use gold to measure prices. Use gold to evaluate whether the good or service you wish to purchase is good value. After all, gold is money.