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You may have read some of the articles lately about the Dow and Gold, and where the market stands today. I got the idea to look at U.S. average home sales and Gold, so I did a little research at the Mortgage Bankers Associate site, combined with some historical data on the price of Gold. What I discovered may not be as shocking as the love that dare not speaks it name, however it certainly indicates to me when it comes to real estate, and gold, a lot of people do get screwed. In 1963, according to what data I could find, the average cost of a home in the United States was $19,300. We know that Gold was fixed at a price of $35.00 an ounce so it is easy to see that the average American home in 1963 was 551 troy ounces of Gold. From 1963 to 1969, the average cost of a home in the United States increased by $8,600, or 44%, or 245 troy ounces of Gold. From what I can tell, in 1969, the year of my birth, a home in the United States was on average 797 troy ounces of Gold. If you use the price of Gold today, say $550, then the average home was nearly $440,000. Suddenly, this home in 1969 is not so cheap after all, yet I am sure if you asked someone about home prices in 1969 they probably would have considered them dirt cheap. By 1980, the relationship between home value and gold had changed considerably. Even though homes had appreciated another 270% during the decade, with an average home going from $27,900 in 1969 to $83,000 in 1980, the price of Gold exploded even more until this average home cost only 127 ounces of Gold!!!! Homes had depreciated 85% in value of gold from their high in 1969, even has they appreciated in U.S. dollars by 270%! Talk about smoke and mirrors! Here is what this looks like in a chart.
Now, I am using the price of gold as it closed at the end of the year so some of the largest peaks are not represented. I am sure that things did get even more extreme as to be expected in a significant economic earthquake which is a very fair evaluation of the 1970’s. It was only a short time period you could pick the average home up for a mere 127 ounces of gold, however it was practically years you could get one for around 200 ounces of Gold. I think the 1970s were a very complex time period which can be a fair argument for why we saw the dislodging in prices that we experienced. However, this decade is proving to be every bit as complex. In the 1970s we had a government deficit spending to fight a foreign war for the cause of democracy and freedom along with a couple really nasty energy crisis shocks. Politically, Republicans got themselves in deep trouble with scandals breaking the law which gave us Mr. Ford as President whom we never even elected to office. The 2000s thankfully are nothing like the 1970s period. First, this war is really for Oil and not freedom and democracy which the American people have been sold as a story. Second, Republicans have become not only better at creating scandal, but surviving through it as well. And Oil is not just going to be a few little shocks in price, but due to the arrival of Peak Oil which is the point where we can no longer pump as much out of the ground as the previous year and experience declines in production world wide forever more, we can bet that the price of Oil is going to go up and up until Americans crawl up in their SUVs and die. So, I am not really sure where suburban sprawl American real estate is going to go, which by the way is incredibly dependent upon a never ending supply of cheap gasoline, but so far the chart indicates above that it may be going BROKE in terms of Gold and BACK to at least 127 troy ounces in the future, if not even less than that. How can I be so sure? Well, I would like to draw you attention to 1969 and 2001. If you bought a home in 1969, for $27,900, and sold it in 2001, for $213,200, you home appreciated about 764% for a capital gain of $185,300. This is the good news, and now the bad news. You lost 24 troy ounces of gold during 32 years, which means if I adjust that home in 1969 dollars, your house lost $863.00. I can put it another way and say you lost approximately 4% of its value from the time of purchase. And these were the two top years and if you look at the trend from an “Elliott Wave” perspective, we are entering the second phase of a bear market in real estate that started in 1969. At the very least, we are still looking at a double top. This is based upon national averages, so I am sure some people did better, but I am equally sure some did far worse. In terms of the historical value of real wealth which is Gold, it is difficult to see how this 764% gain in dollars actually increased your net value. But wait, it gets even better. Let’s say back in 1974 a “couple”gets together and decides they want to buy a house together. However, due to lending practices they are not able to qualify for a loan due to their marriage status. This is way before a lender would practically finance someone with a paper route and not yet out of high school. So, they decided to save their money in gold due to inflation. They would only have to save about $24,130 of 1974 Gold to buy a home in 1981 completely out right. Between two people, we are talking $243 per month for each of them, for five years and they could walk into the average home within just a few more years for less than a home would have cost in Gold in 1974. And then, in 2001, they decide to sell their home and just rent. This 127 troy ounces of gold has now increased to 772 troy ounce of gold, which is 600% increase in real wealth, but only a 300% gain in dollar value. Take the gold and run! Here is where the sad ending and trailer comes into play. Again, today is not the 1970’s. We have banks lending people money if they so much as think they can pay it back. And then we have banks lending money that do not even care if the borrower can pay it back. People have much higher debt to income ratios today and far less savings. The Government is in far more debt today because in the 1970’s we were still a net creditor nation. Those days are over and gone. And, not only did we get a fix on our energy situation after 1981, but we found and exploited even more oil until today we are pumping nearly 85 million barrels a day from the ground world wide. Unless we discover that every home in America is built atop an oil well, we are likely entering the mother of all energy crisis’s known as Peak Oil. So, to expect a replay of the 1970’s is probably asking for way too much. Not only are home prices depreciating in terms of gold today, but they are likely in many cases to completely collapse in the future. I would not be surprise that someday you could pick up on of these 4000 sq foot McMansons on the outer asteroid belt of a city for 50 or 25 Troy Ounce of Gold. And all these fancy loans with enough terms and conditions to tie the monthly mortgage to a sign in the zodiac are likely to wipe out quite a few Americans as the typical homeowner gets squeezed between rising energy cost and home mortgage cost due to rising interest rates. Therefore, it is not difficult to see that we may be in the presence of a lot of people who at the end of the day will have little to anything left in real wealth after this housing boom and bust cycle. They fell in love with something that eventually proved to be their downfall which happens to be easy credit. Another interesting thing which I would like to draw you attention to is that those homes in the 1970’s still went up 270% in paper dollars from the peak in terms of gold in 1969. If that trend does play out this decade, then the average American home might cost $583,816 in just a few more years. This could happen in a hyperinflation economy. When I take that amount and divide it by 127 troy ounces of gold, then we might easily see $4,600 prices for Gold at the end of the day. But, this is all just guessing, because I am not at all convinced that we can compare what we faced in 1969, to what we face today. I can certainly see the possibility of other outcomes in the year 2012. So if you really want to buy a house, I suggest you start saving your money in Gold. If you start soon, you many not need the assistance of a bank at all. Today, homes are still very expensive historically, so I am waiting things out. Besides, you do not want to buy something which may depreciate even more due to a changing picture in the supply and demand of oil. By the time you save enough gold up, that just may be the preferred method of payment in this country. But, this is just my own idea and since I live in one of the most outrageous real estate markets in the nation I am far more cautious. I don’t mind watching tragic movies, but I do not wish to become a character in them. David
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