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  • Houses Priced in Gold?

    Ladies and Gentlemen in Pawnland!

    Here is a very interesting piece that provides you some true introspect as to the effect the slump of the economy and particularly the housing markets have been affected by economic conditions, put some real spin on it for your enjoyment, or not!

    Home Prices vs. Home Values

    By Charles Vollum

    [Ed. Note: I have often said that our readers are the best people in world, a view that is reinforced in my mind at every Casey Research Summit, or during the events held  biannually at the rapidly emerging community of La Estancia de Cafayate – where I first met Charles Vollum, with whom I am proud to now share a property line. An incredibly interesting individual with a wide range of interests – one of which is reflected in the work he does for his website, www.pricedingold.com. He wrote up the following on June 1, in response to the latest press release on the Case-Shiller Home Price Index.]

    Yesterday, Standard and Poors issued the latest update to its Case-Shiller Home Price series.

    The press release begins, “Data through March 2011 … show that the U.S. National Home Price Index declined by 4.2% in the first quarter of 2011, after having fallen 3.6% in the fourth quarter of 2010. The National Index hit a new recession low with the first quarter’s data and posted an annual decline of 5.1% versus the first quarter of 2010.”

    Then comes the key statement: “Nationally, home prices are back to their mid-2002 levels.”

    This means that on the average, a home in the U.S. that was purchased for $200,000 in mid-2002 would have sold for about the same price two months ago. So after owning the home for almost nine years, you could sell it and break even – no capital gain nor loss, and all of the cash you originally invested would be returned to you.

    But the dollars returned are not the same dollars that were invested! The U.S. dollar of mid-2002 could buy a lot more than the spring 2011 model… A barrel of crude oil cost $27 then, but about $100 now. A gallon of gasoline was $1.43 then, but $3.90 now. To purchase a shopping basket of food totaling $88 in mid-2002 would now ring the register for $232. An ounce of gold was around $315 back then, but over $1400 at the end of Q1 2011!

    So that house may have the same dollar price, but it does not have the same value.

    The price distortions caused by a depreciating currency play havoc with investors’ efforts to decide what price to pay for assets, as well as making it difficult to tell when to sell. After all, our goal isn’t just to build an account with big numbers in it – we want to be able to afford a better life for ourselves and our families.

    One approach to solving this problem is to price things using a more stable form of money – one that cannot be created and destroyed at the whim of a central bank. Gold.

    In July of 2002, one dollar would buy 100 mg of gold – a penny was a milligram. In March of 2011, one dollar bought only 22 mg of gold. – and at the end of May, just 20 mg. Some things are more expensive today in gold terms, but many are not. For instance, it takes less gold to buy a barrel of crude today than in 2002 (2.0 grams instead of 2.7 grams), but it takes a bit more gold to buy a pound of coffee (54 mg instead of 50 mg). And yet, both coffee and crude oil are several times more expensive in dollars than they were nine years ago. The same goes for silver, food, copper, gasoline, postage, college tuition… almost anything you can think of.

    Except houses.

    Using gold as the standard of measure shows what is really happening with home values:


    Home values haven’t just rolled back to their 2002 levels – they have been making new all-time lows every quarter for the last year!

    This chart by itself can’t tell you whether it is time to buy a house, or if it is too late to sell that second home. Prices could keep falling, or they could stabilize and begin to recover; that will be determined by the supply of homes on the market, the needs of buyers, and the strength of their finances.

    One thing is certain: in the aggregate, home values will never go to zero. People need to live somewhere, and real property has real value.  But in the coming months, the dollar price of housing may stabilize, and even rise if QE3 is launched or massive amounts of new fiat money are created to bail out Europe or to contain some other emerging crisis – even as real values are stagnant or falling. Take a look at 2001-2006 and 2009-2011 in the chart above for examples of this.

    The key to understanding what’s really happening to home values, and other prices, is to watch them priced in gold.

    And that, dear reader, is that for this week. Until next week, thank you for reading and for subscribing to a Casey Research service!

    Jerry Whitehead

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