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Is housing undervalued?
Friday, August 17, 2007
Every time I get the feeling that I've become too rancorous in my ongoing plight to expose the damage being done to the world by economists - for example, last week's suggestion that two-thirds (maybe seven-eighths) of them should be taken out back and shot - along comes another one to make me think that I'm actually going too easy on them.
Such was the case this morning in this horrifyingly dimwitted op-ed($) from the Wall Street Journal where it is asserted that housing may be undervalued based on its price relationship to gold - whaaaaaaaaa!There is a particularly strong correlation between percentage changes in housing prices and percentage changes in the price of gold -- especially when a short time lag is taken into account.
Yeah, and when's the last time you heard of someone taking out a subprime, negative amortization, teaser rate, no-money-down loan to go and buy gold coins.
When paper money is depreciating rapidly, as in the last five years, it is normal for tangible assets such as housing to appreciate more rapidly than usual, while financial assets such as stocks and bonds tend to perform relatively poorly.
...
Instead of viewing the price performance of housing during the first half of the current decade as a "bubble," I see it as having appreciated for the same reason that the prices of commodities and other tangible assets have appreciated. In nominal dollar terms these prices have to rise in order to maintain the status quo in real terms. The rise in housing prices is one more symptom or early warning of the inflation of which the Fed (rightly) is so fearful.
Someone get me a gun!
Though not identified as a practitioner of the dismal science in the editorial, a quick bit of fact checking on one R. David Ranson reveals what should have been obvious just from reading the title.
He is indeed an economist. He is indeed hopelessly out of touch with reality.
23 comments:
"When paper money is depreciating rapidly, as in the last five years"
And this isn't a problem??
is this guy retarded or is he a Nobel prize winner?
I buy into it. Especially when we have a fed that uses "core-cpi" and even back away from such a measly measurement.
The fed may never allow "nominal" prices of housing to drop.
What's the fed going to use next? Cost to reach mars CPI?
Tim, I think you're too hard on the guy.
Seriously.
Given the environment of easier money, houses are a commodity, and prices do respond to supply/demand.
You wrote a post sometime back that made a lot of sense to me .... reverting to the mean.
Where I live, housing prices have risen at a overall rate of about 6% annually. That may be different in different locations. But what is currently happening is a reversion to the mean. Obviously, the further away from the mean for an area, the more bubblicious. But the fact remains that houses do appreciate, prices are falling and at some point houses do become "cheap". Whether we're there or not yet may be a bigger question. In some areas of the country (SF Bay Area) I think we're much closer than others (Florida or Modesto).
My bigger question is what happens at the end of the baby boomers? There'll be whole lots of houses and much fewer buyers. That would be when a real housing deflation will set in.
And BTW, people do buy gold on margin all the time. I'm not sure measuring house prices vs. gold is any worse than, say, measure the cost of an automobile (or anything for that matter) vs. gold. No comparison will ever be perfect.
I give this guy an A+ for original thinking - I had not heard that one before.
So he's saying that physical objects can never be overvalued? So the Florida land bubble and the Tokyo land bubble were actually valid prices? And today's lower prices are a mirage?
What he fails to realize is that once must discern whether an asset is fairly priced based on its fundamentals, or if it's in a speculative bubble. That has to be the first criteria to evaluate whether the price makes sense.
No, the guy really is dumb. People don't earn gold, they earn dollars. It doesn't matter what the prices of homes are relative to gold; it matters what the prices of homes are relative to the dollar earnings of Americans.
Um... the problem with the comparison is that Housing:
1. Isn't divisible into tiny pieces (I can't buy an ounce of housing).
2. (Most importantly) It's value is in its byproduct which people need to consume - shelter. (vs. gold, which people value because it's shiny).
Because of number 2, the price of acquiring a house must fall within the limits of human consumption, which is constrained by income, and because of number 1, that house must be sufficiently large to provide shelter to a family.
Really, the important variable is income (which places a strict upper limit on prices (unless there is subprime garbage out there). Not freaking gold prices.
i buy a home (in california) because of the weather, because of the location (calif is special), and because they arent making any more land!
they are making plenty of gold....
Seems to me that there is a direct relationship between the value of dollars, and the value of gold ...
And homes are divisible, like REIT's, owning apartments etc. And gold prices are impacted by being consumed, i.e. industrial uses as well as being "consumed" because people desire it's shininess. No one needs a McMansion, they desire it.
Also note, the article author says there is a correlation between gold and housing with both being affected by many (not all) of the same factors.
Isn't one of the hopes of those of us who buy gold is that, when the retail investors wakes up to the value of gold, there'll essentially be a bubble in gold prices?
A few years ago on SafeHaven some lunatic posed this same argument by graphing home prices against "goldgrams". I believe current and future housing vs. gold prices will firmly dispel this notion.
"Everything I need to know about markets, I learned in econ 101":
SUPPLY AND DEMAND.
Nothing unusual happened to the supply of gold -- it continues to be mined out of the ground at the same approx. 2-3% growth rate a year.
But the supply of housing skyrocketed.
Then, the demand plummetted, as unsound loans got hard to get (go figure).
End result? A price crash. And justified, too.
There is some "real value" in houses -- I'm just not sure how much of the price that constitutes these days. 35-75% probably, depending on where you are.
Indeed, there is even some fictitious value in gold, as hedge funds have bought lots of stuff with leverage (the ETFs make it even easier). But gold has tremendous long-term potential as a safe haven and inflation hedge. It all gets uglier from here.
Tim - as a disclosure, I had couple beers or maybe more on Friday night.
Aren't you a jerk here? The guy is saying price of housing is growing at the rate greater than rate of growth of gold. And you are attributing him with exactly opposite point of view.
No disregard in respect to shooting economists, but I would rather start with politicians. BTW, it looks like most of your readers can't do basic math.
Alternatively, I am a dumb f*ck and you need to explain yourself better to some of us.
As a disclosure - I just had a cup of coffee.
To suggest that housing is undervalued because the price of gold has been rising faster than the price of housing - this is patently absurd.
There are so many unrelated factors involved in pricing both of these that drawing conclusions based on their relationship is just stupid.
The point is that the average middle class home should have the same cost over time when priced in gold.
(Actually, as productivity increases, the price of an average home should gradually decrease in terms of gold.)
Ok, I get it, we can shoot that guy
I think you're attributing a motive to the author not evident in what he writes (that he's a housing cheerleader)....he seems to be saying that the housing boom is an inflationary sign...not that it's a rah-rah good thing.
I used to ask my dad, how much is it worth?
My dad would always respond, "it's worth whatever someone will pay for it".
That's econ 101 for everything, whether gold or houses. How an individual decides whether "it's worth it" is as varied as the number of people. Measuring a house value vs. gold is no "stupider" than measuring against what your best friend just bought, or frankly any other measure. It's all subjective measures anyway.
lets replace gold with DOW-Jone AIG commodity index.
i do believe that makes it much more valid.
From reading this all of these comments, seems people still don't 'get' gold but they're starting to pay a little more attention. I think it is a sign of how unpopular it still is. It's going to take a truly religious experience for most to finally get 'why gold?' No worries. That is coming soon enough. This time the mess finally is too big to bail out.
has housing appreciated more or less than more essential commdities like oil, for example?
Gold, oil, and gasoline have risen because of huge new demand in places like India and China. In other words, new people from all over the world are competing for limited supplies. They are not competing to buy your house, as you can plainly see if there happens to be a "For Sale" sign in front of it.
That WSJ article was complete BS and it is amazing it made it to print. Anyone with half a brain knows that housing prices exploded because of interest rates that were too low and lending standards that were too lax. What is important is the amount of rent you could expect to get from a house. By that measure, real estate in many areas of the country is in bubble territory. The depreciation will take years as people come to grips with this fact.
houses do not appreciate - they depreciate.
land is a commodity that appreciates because of dollar devaluation. Ranson is comparing apples to apples here. Analyzing which commodities are out of whack with each other can be a very profitable exercise.
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