REAL ESTATE: GOLD RATIO FALLS TO 30 YEAR LOW
27 January 2012 by Cullen Roche
16 Comments
After record bear and bull markets in both real estate and gold, the real estate:gold ratio might be telling us that we’ve reached an extreme trough in real estate prices. The ratio hasn’t been this low in over 30 years (via Chart of the Day):
“Severely depressed real estate prices continue to be a concern for investors. For some perspective on the magnitude of the decline in home prices, today’s chart presents the median single-family home price divided by the price of one ounce of gold. This results in the home / gold ratio or the cost of the median single-family home in ounces of gold. For example, it currently takes a relatively low 105 ounces of gold to buy the median single-family home. This is dramatically less than the 601 ounces it took back in 2001. When priced in gold, the median single-family home is down over 80% from its 2001 peak, remains well within the confines of a six-year accelerated downtrend and remains very near its 1980 trough.”
Very good chart. Pity, it is only starts from 1970… would be nice to see this relationship all the way thtough 1900. Also, it would be nice to know what were housing stats, like inventory, family formation, % of income spent on house, back in 1980.
One thing I know is that the interest rate was in the high teens in early 80s, and it is zero today. How is that fitting in the equation? If the interest rate is moving higher, then what? Maybe this time is different?
It means the real price of real estate is much lower than the chart indicates
Gold prices are driven higher by low real interest rates, which has fueled the 11-year rally. Normally this would also be helpful to the housing market due to low real mortgage rates incentivizing borrowing. However, we are in a deleveraging phase now which make the low rates inept, and when that is combined with the massive oversupply in the housing market, I think this ratio heads even lower.
So is real estate low, or is gold in a bubble?
Yes.
Right now, I am more inclined to say real estate is low. And that gold is still approaching a bubble….
The graph tells us that if one had the choice between gold and real estate in the last 30 years then:
1. one should have invested in real estate during the 1980s and 1990s
2. gold would have provided a better return starting in 2000. It indicates that one ounce of gold would have bought you more and more real estate since the year 2000. A true store of value.
I personally expect this ratio to go down the drain in the coming years. Gold WILL be hit in the upleg of the USD but real estate WILL get massacred. (say minus 90 percent).
CR-
More evidence of a possible end to your balance sheet recesssion in 2013-2014.(Which is your call)
That sounds good to me and my neighbors. Every client I’ve spoken with is very tempered optimistic in their business. The major fortune 500 company we have here has been spending on sales meetings like the old “Enron you tube” days of old. And they have been very prudent/conservative the past 4 years. My appraisal clients are killing it right now. Man I love grapsh like the one you posted. To think I’m alive..to get a chance to invest like it was 32 years ago…is an opportunity I won’t miss out. Even if it’s not the perfect trough.
all good points above, I’ve a dour view on real estate, I note a few more mortgagee auctions locally, so nearer bottom? but I’d pick that its a “generals planning to fight last war” type of thing where too many people think they gona get rich on the next pick up that – I think wont be nearly as vigorous as 2000-06
least you can buy gold without a laywer getting involved.
Real estate value is a function of tax, repair cost, depreciation rate, inflation, interest rate and rental price. With 30 year interest rate at 3%, rental market still strong (many hovering around 8-10% return), it’s time for people who has good credit use their credit wisely and leverage up on good deals.
IMHO, confounding variables like in this chart make the analysis a lot harder, not simpler. It just blows my mind. I cannot make up any hard conclusions. It is like when Faber talks about the price of an US-based asset in terms of something other than USD. The first thought that comes to mind is: so what?
RE, historically, on average, about keeps in line with the rate of inflation but bubbles develop which make it overshoot in the way up and the way down. It used to be that Gold, like RE, was a “store of value”. Until Nixon trashed it and it became a relic. Since the tech bubble burst, gold started its march up, indicating some believe it has come back. With such discontinuity event in the middle of gold’s history, I think it is foolish to try and make anything out of the chart. The same chart could have been used to say that US home prices were not in a bubble in 2005; after all, in gold terms they were only at 1985 levels in terms of gold.
I have faith in technology, humanity, the advancement of economics, and thus in the improvement that fiat currencies represent. So I believe gold will eventually return to his “barbaric relic” status (Roubini’s words). However, it is going through a testing phase. Apparently, BB just threw some napalm into the gold bubble fire with his actions/words a couple of days ago.
As for residential RE, local housing bubbles of the past have taken a lot longer than 5 years to reach bottom. It would appear we are still a bit early to be calling a bottom here; however, if you need to buy a decently priced home, have the means, and don’t consider it a getting rich investment, there are plenty of markets where one can find excellent buys.
Whenever something gets cheap, I remember Michael Price trying to catch a bottom on the price of Citi after the tequila crisis.
Last year, it happened to me with Japan, I bought EWJ LEAPS after the earthquake and by late December they had lost 80% of their value.
Bottom line, RE has always represented a store f value. Gold used to represent a store of value, became a closet relic, and since 2000, was de-dusted, taken out of the closet and started going up on the hope it could become hard currency again. Given golds march, comparing the price of RE and gold is like comparing apples and oranges.
Just trying to make some time to SE how trading goes in the last hour. US equities are still extremely resilient. But one of diz days, when they start falling they will fall hard and there will not be chairs left:-) better stop writting and hit the Nordictrack (the wooden original) that is another relic:-)
Platinum/Gold ratio also quite interesting. Or Platinum/Silver.
I have a bit of a conundrum – we need more space, so we may be in the real estate market soon. Prices in the Boston area are still fairly high and here’s very little supply. Perhaps i can talk my wife in kids into living in a tent!