Monday, May 01, 2006

Marin's Golden Houses

Some people argue that the US Dollar is a "fiat currency" and not real money (the list of groups who debate this issue is endless, but you can find some good discussions here, here, and here). To these folks "real money" is gold. I don't want to get into that debate now but I did want to know how much a house in Marin would cost if money was denominated in ounces of gold and not created out of thin air.

So here's the answer. In order to make the following graph I took the mean price of a SFR in Marin and divided it by the average price of an ounce of gold for that year (so sales prices are automatically adjusted for inflation as well as the amount of fiat currency in circulation [which some would say is exactly the same thing as inflation]). The result is how many ounces of gold you would have to fork over to buy a house in Marin for the 40 years spanning 1965 to 2005 (in blue); the data for May 1, 2006 is in red.

There are at least a few interesting features of the plotted data:
  1. First, notice the way house prices (in terms of ounces of gold) jumped in the mid-90's to its maximum in 2001. After the terrorist attacks in NYC the price of a house in Marin actually fell and fell hard (-20% as of 2005 and -28% as of today).
  2. Furthermore, this graph is yet another demonstration of how Marin house prices and values do in fact fall in real terms; I count seven drops in value in all, five of which were significant.
  3. Last and certainly not the least, the price of a Marin house, in terms of ounces of gold, was essentially flat from 2003 to 2005, inclusive. Yet, as we all know, house prices (in "fiat dollars") in Marin went ballistic during that time. I think that clearly demonstrates the effects of easy credit and the rampant printing of dollars during those years.
Here is what the average price of a house, in terms of gold, has looked like in the UK (from April, 2004 to April, 2006); like Marin, it's down:

It might prove interesting if others repeated this analysis for their real estate markets so that we could compare and contrast.



Blogger fredtobik said...

Nice graph.
You do realize that gold is at a 25 year high, and that it will go higher?

1,000k an ounce probably...

I got in early, probably fund a few Marin properties as soon as the housing crash comes.

May 1, 2006, 9:00:00 PM  
Blogger Athena said...

WOW! Now that is an interesting graph. Clearly funny money is a whole lot more fun to play with for some... it clearly hides its losses better...but for just how long will it hold out?

May 1, 2006, 10:19:00 PM  
Blogger Chuck Ponzi said...

I have to agree with you on this. I'm not really a gold bug, and have very little invested into the metal. It's really only a hedge against USD meltdown, but I have several stocks that may or may not outperform the drop in the dollar in relative terms (if and only if Bernanke doesn't have the balls to raise rates to 6-7% FFR) If he does, gold will only stagnate at current prices (unless we're starting a speculative episode of gold, in which case, it doesn't matter what the hell the FED does because it will go up to at least 2K per ounce in that case anyway) Remember, generally, money is not an investment, it's like liquidating an asset except that gold "should" hold its value fairly well. However, it has been in a bear market (or is it that the USD has been in a raging bull market?) for about 20 years now.

What would be most interesting is to see the "average price" of a house in Marin in terms of gold. Because gold is an inflation hedge, it should show you about what the fair value of a house is (at current prices of gold, since money is generally not forward-looking like stocks are until you get into a speculative episode) That might be something else that is interesting to see.

May 2, 2006, 11:24:00 AM  
Blogger palladium said...

You could price it in Euro's or many other currencies over the past five or so year's and see a similar pattern.

For that matter, price it in terms of gallons of gasoline of barrels of crude. If you do that, you will see that "value" topped out at least one year ago.

RE USD denominated assets will not be huge winners in the future in my opinion. That said, who knows what kind of bizarre economic distortions our friends in Sac and DC will throw into the mix.

Might as well buy more gold anyway....

May 3, 2006, 7:21:00 PM  

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