Friday, September 25, 2009

Dollars don't tell the story on your home value.

On several occasions over the past couple of years there have been charts with trendlines posted here, showing the equilibrium value of homes would need to fall a lot from their peak to reach their "real" value. Sometime next year, we will likely reach, and possibly overshoot, the "real" value of residential homes in America - which should not be confused with the "market bottom," which may fall below the "real" value.

How do we find out the "real" value of something? Price it relative to an actual thing of value - a commodity, such as precious metals, whose availability, unlike dollars, cannot be churned off printing presses in the middle of the night in secret at will.

of two
When Housing is Priced in Gold
Charles Hugh Smith
September 23, 2009

Pricing U.S. homes in gold reveals that housing has fallen by two-thirds from its 2005 peak.

...Considering all metrics of value in terms of purchasing power reveals much more insightful measures of value than nominal prices.

For instance, measuring the cost of housing in terms of "how many loaves of bread would be needed to buy a house?" is a more accurate measure of purchasing power and valuation than measuring housing in terms of dollars, which have lost 25% of their value to inflation in the past decade and much more when compared to other currencies.

Since gold is a universal metric of money, let's see how housing has done when priced in gold...

...Priced in gold, housing has already fallen 2/3 from its 2005 peak when priced in gold. The charts plot the well-known Case-Shiller Housing Composite as the proxy for the U.S. housing market.

The first chart is the S&P Case-Shiller House Price Composite (black line). The red line is an RS (relative-strength) of the composite to gold. Historical comparison suggests home prices are still overvalued. The red line indicates that homes are worth in gold what they were in the late 1980's while nominal prices remain elevated...

...But if nominal prices revert to pre-bubble valuations (1997-98), which is the typical course of popped asset bubbles, then we could see housing become even cheaper when priced in gold.

That is, if gold continues rising and housing continues declining, then it is certainly possible that the median house price could fall to 100 ounces of gold--a mere 20% of its 2005 peak.

Should gold plummet, then of course housing would rise in relative performance even if it remained flatlined in nominal prices. If gold were about to fall dramatically, then this could be the relative valley in housing/gold valuations.

But the more likely scenario remains a continuing decline in nominal housing prices back to pre-bubble valuations. In this case, even if gold remains flatlined at $1,000 an ounce, then it will take fewer ounces of gold to buy a house in the future.

The point is to consider housing in relation to purchasing power/relative performance, not just in nominal dollar terms. Housing will always have value as shelter and land will always have value as productive dirt, but we must be skeptical of the constant hype that "a home is your best investment."

For the past eight years, when priced in gold, that has been patently false.

Jewish families have been less likely to buy their main home as an "investment" simply because so many other factors come into play - such as walkability to a "good" shul, for example, and the presence or absence of an eruv in that neighborhood.

But nobody bought a house in the last 10 years expecting to lose money on it, or to be trapped into mortgages far and away over the top of the actual value of their property. So observant families are stuck in a mess not entirely of their own making, in that regard. To the extent that wealthy Jewish families bought houses to rent them or sell them later, they are likely to end up in foreclosure eventually - just like their gentile neighbors - when people's incomes can no longer support the rent prices needed to cover their mortgages. That day is here or very near for a great many neighborhoods already.

For the wider market, the bottom has not yet been reached and isn't near to being reached, regardless of what your local board of realtors has been spouting in their commercials. And as more and more of our friends and relatives lose their full-time jobs and their homes, those of us that do still have a house are going to need to make room for them. On the upside, this can spread out the adult responsibilities in the home, including the bills, and be a workable arrangement. On the downside, Americans have no institutional memory of multi-generational or communal housing and have unrealistic western cultural expectations about "rights" and "space" that are going to be difficult to overcome without some serious attitude adjustments.

And I'm not sure most of us are up to it, class. With young people still expecting champaign standards on beer income, so to speak, there will be a lot of angst involved before reality settles into a realistic and reasonable standard of living. The "entitlement" culture has to give way to a more kibbutz-like culture, or our families, friends, and communities won't be able to tread water, much less swim to safety. The debt-based consumerist more-more-more economy is sinking fast - if we can't get away fast enough, it's going to drag us down with it.

Or rather, IS dragging us down, since we refuse to re-orient our communities and expectations for localism and sustainability. The ship is going down: dayschools, yeshivas, kollels, shuls, federations and charities are all in deep trouble. Employment is crashing and burning but nobody is willing to invest in the community's future and make the necessary changes.

I know now how Jeremiah or Elijah must have felt - what an incredible waste it is to see your people throwing away their future with both hands, with no one willing to listen to reason or act responsibly. Will the wise remnant please stand up? The more voices there are the more chances that people will listen.

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