Gold / Home Ratio

[flyer38]

I've attached a chart that traces the median price of a home (nationwide) vs. the # gold (ounces) required to purchase the median home since 1972. I think this is a good general rule of thumb, but does not consider local markets and other factors.

The ratio hit a low mark in 1980 when it took around 73 ounces (when gold hit a high of $850 in 1980, median home was $62,200.00) to purchase the median home. It hit a high in 2001 when it took 545 ounces of gold to buy the median home (home price was $147,800.00, gold was $270)



Today the ratio is roughly around 200, with median home price at $180,000 and gold at $900/ounce. I could see it back at around 100 ounces (or less), with gold at $1,600 and median home price at $160,000. But this ratio could get even lower if the world decides it needs to go back to an international gold standard to fix the imbalances between creditor (Asia) nations, and debtor (U.S.) nations. Or if there is a currency panic, or some other unpredictable event.

Anyway. I think I'll get 50% out of the gold fund I'm in (GLD ) when the ratio hits 100 ounces and buy some real estate, and I'll let the rest of it ride in case gold hits $5,000+ an ounce.

Let me know what you think.

[Sharky]

Re: Gold / Home Ratio

Using gold to home prices might be a good metric for timing when to exit -- maybe together with the Dow to Gold ratio. However, it would be interesting to see a longer history than just since the 1970s.

I recall hearing that during Weimar Germany it was possible to buy an entire city block in Berlin for one ounce of gold. I'm not saying things will be that bad this time, but even the 73 ounces for a median home in 1980 could be a very high number by the time the bottom hits.

[KenD]

Re: Gold / Home Ratio

For the life of me, I cannot understand why this is a valid metric for comparison, other than where might be the best place to invest one's money.

Yes, I understand that gold prices are a standard around the world but real estate prices vary by location. It appears to me that using a median housing price is deceptive, as real estate markets float independently of one another, oftentimes within miles of each other in the same state.

So, if we pin the price of gold to one large area (say the United States) how does that allow us to evaluate individual markets based on their performance?

Another question I have is, if we take for granted that the Case-Shiller Index clearly shows that real estate, taken over the long term, never really out performs inflation, why would we want to gamble on real estate, unless we are looking for high risk, short term gains? Even at that, this type of investing appears to an outsider as "betting on the ponies" because unless you have an uncanny ability to know when to bet and which horse to bet on you are going to end up being the last guy holding the hot potato (if you will please forgive the mixed metaphor).

[Sharky]

Re: Gold / Home Ratio

For the life of me, I cannot understand why this is a valid metric for comparison, other than where might be the best place to invest one's money.

It's all about asset allocation. Historically, stocks and real estate have out-performed other asset classes after an extended deflationary period, while gold performs poorly.

Of course if the FIRE economy isn't re-started, as I expect it won't be, then timing and holding periods could be much different than they have been previously. Personally, I'm expecting RE to continue declining for quite a few more years.

Yes, I understand that gold prices are a standard around the world but real estate prices vary by location. It appears to me that using a median housing price is deceptive, as real estate markets float independently of one another, oftentimes within miles of each other in the same state.

A broad market buy signal doesn't mean that everything in that market is good. Some areas will be better than others, some houses will be better than others, some stocks will be better than others -- but those are second-order decisions.

So, if we pin the price of gold to one large area (say the United States) how does that allow us to evaluate individual markets based on their performance?

It doesn't -- it's only a broad sense.

Another question I have is, if we take for granted that the Case-Shiller Index clearly shows that real estate, taken over the long term, never really out performs inflation, why would we want to gamble on real estate, unless we are looking for high risk, short term gains?

I think what Case-Shiller shows is that you don't want to hold RE for the long term. In fact, I think it's clear now that there are no asset classes that are safe for the long term.

[*T*]

Re: Gold / Home Ratio

I've attached a chart that traces the median price of a home (nationwide) vs. the # gold (ounces) required to purchase the median home since 1972. I think this is a good general rule of thumb, but does not consider local markets and other factors.

The ratio hit a low mark in 1980 when it took around 73 ounces (when gold hit a high of $850 in 1980, median home was $62,200.00) to purchase the median home. It hit a high in 2001 when it took 545 ounces of gold to buy the median home (home price was $147,800.00, gold was $270)



Today the ratio is roughly around 200, with median home price at $180,000 and gold at $900/ounce. I could see it back at around 100 ounces (or less), with gold at $1,600 and median home price at $160,000. But this ratio could get even lower if the world decides it needs to go back to an international gold standard to fix the imbalances between creditor (Asia) nations, and debtor (U.S.) nations. Or if there is a currency panic, or some other unpredictable event.

Anyway. I think I'll get 50% out of the gold fund I'm in (GLD ) when the ratio hits 100 ounces and buy some real estate, and I'll let the rest of it ride in case gold hits $5,000+ an ounce.

Let me know what you think.

There are a couple of other threads on iTulip discussing this graph (sorry, too lazy to find links right now). The 100oz rule is actually quite stable over time and is about the same in the UK & some other countries as well.

I think it is a stable relation between wages, gold and what people can afford to pay for property.

[KenD]

Re: Gold / Home Ratio

Thanks Sharky,

Your explanation made a lot of sense and certainly helped me put this in a much clearer light.

[billstew]

Re: Gold / Home Ratio

I've attached a chart [in original post] that traces the median price of a home (nationwide) vs. the # gold (ounces) required to purchase the median home since 1972.

I think this is a good general rule of thumb, but does not consider local markets and other factors.

The ratio hit a low mark in 1980 when it took around 73 ounces (when gold hit a high of $850 in 1980, median home was $62,200.00) to purchase the median home.

It hit a high in 2001 when it took 545 ounces of gold to buy the median home (home price was $147,800.00, gold was $270)

Let me know what you think.

This is very interesting economics work.

I would love to see a similar chart for

• Australia
• Canada
• NZ
• UK
• Eurozone
• Japan
• Korea

It is in the large number of charts that interesting signals can be extracted.

[jimmygu3]

Re: Gold / Home Ratio

Using gold to home prices might be a good metric for timing when to exit -- maybe together with the Dow to Gold ratio. However, it would be interesting to see a longer history than just since the 1970s.

I recall hearing that during Weimar Germany it was possible to buy an entire city block in Berlin for one ounce of gold. I'm not saying things will be that bad this time, but even the 73 ounces for a median home in 1980 could be a very high number by the time the bottom hits.

See my opinion here.

Gold in 1980 only closed above $700 on 6 separate days and above $800 on 2 days. You would have needed a lot of luck to catch those tops. Most of the year it bounced around the fives and sixes, averaging $615. That puts a 1595sf 1980 median home at 101 ounces.

At this year's average gold price ($904/oz), you can buy that same 1595sf house for about 132 ounces. If we see a further 10% drop in housing and gold at $1075 (both possible in '09 IMO), we will be at 100-to-1 for the same house.

Of course the apples-to-oranges median home price comparison tells you differently because people started building bigger homes and the median is now 2352sf. Sorry, but if people think that 100 oz should buy a 50% larger house now than it did in 1980, I fail to see that logic.

Jimmy

[*T*]

Re: Gold / Home Ratio

This is very interesting economics work.

I would love to see a similar chart for

• Australia
• Canada
• NZ
• UK
• Eurozone
• Japan
• Korea

It is in the large number of charts that interesting signals can be extracted.

I will get round to updating it at some point...

[Sharky]

Re: Gold / Home Ratio

Here's NZ info. The current median house price is around NZ$330,000. With gold at NZ$1700/oz, that puts the current ratio at about 194:1.

[billstew]

Re: Gold / Home Ratio

You need to re-edit your initial post to restore its image, somehow it became accidentally deleted due to a site programming bug.