Macro Economics
Gold vs. Housing

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By Dwdonhoff
September 14, 2009

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A very interesting chart on the value of real estate in terms of gold.

Recognize; This is NOT so much a testament to the status of either real estate on its own, nor gold on its own... but rather a comparison of two HARD ASSET classes.

One (Gold) is easily acquired, easily transported, universally accepted/converted, easily kept private/secret, easily hidden & defended, and very difficult to tax....
The downside, of course, it is extremely difficult to leverage (let alone to leverage with depreciating currency,) and difficult to put to work generating a yield/income.

The other (real estate) is almost exactly the opposite; Permanently located, a complex purchase process, publicly titled, uniquely valued relative to location & functionality, impossible to hide, difficult to defend against predatory litigation, and a "sitting duck" (literally) for predatory taxation.

The UPSIDE is that the overwhelming majority of the world's "strong hands" control real estate and therefore the realistic taxation will always be minimized (and/or passed through to the non-owner consumers.) Real estate is leverageable with OPM (borrowing decaying money today to buy & keep non-decaying assets, then repaying later with the decimated cheaper currencies,) and can far more easily generate a yield/income via rental proceeds which dynamically tend to increase in proportion to the costs of the leverage, and any taxation burdens... thereby making real estate a "hard asset" that can not just figuratively BUT LITERALLY "pay for its own keep" while the owner sits back and accrues the appreciation.

Gold is a "pure speculation play" in that it is difficult (if not impossible) to acquire gold at much of a real discount below its actual real-time market price... conversely, when it comes time to sell gold, it is equally difficult (if not impossible) to sell it at any real premium above its then-current real-time market price.

Real estate, on the other hand, can be bought and sold at a WIDE RANGE of discounts and premiums, all relative to the hunger and motivation of the counter-party to each transaction. Of course, this is a double-edged sword... so if one is a principal to a real estate transaction, you would always want to be in the "strong hand" position with the greater of time and term flexibility.

QUITE INTERESTINGLY, the article's author is quite clearly a "Gold bug" with a speculative gambler's lust to the point of blindness (in my opinion.) He states that;
This means that there is an absolutely huge pent-up supply of homes that will need to be sold onto the market eventually. This supply will hit right as the psychology for "investing" in real estate turns seriously south. People will be looking to rent, not buy, and yet an absolute flood of homes will need to be brought to market in this environment. By the way, the ability of people to buy (due to worsening unemployment and and ever tightening lending standards) will have decreased further as this supply eventually makes its way to the market.

Oddly, he says this like it is a *BAD* thing for income/yield buyers and leveraging inflation hedgers (very telling of his "speculative/gambler" mindset...) but this is clearly "the Perfect Storm ADVANTAGE" to such savvy investors!

Many of these homes will be rented, (make note and visit the Wall Street Journal article linked) forcing rents to decline as well (which in turn lowers the value of a home for a potential investor looking to buy a rental property).

He fails to realize that there ARE NO NEW HOMES COMING INTO INVENTORY... virtually all the new home builders have GONE BANKRUPT (or are hiding it out!) Instead, *ALL* the "for sale" inventory is coming from desperate OCCUPANTS and "Don't-Wanna-Be-Landlords!" Once again... for patient, smart, liquid, savvy buyers; THE PERFECT STORM!!!

In order to UN-occupy the home that is sold, ANOTHER home must them be rented! There are NOT MORE HOMES in terms of absolute supply... it is simply a gigantic game of "musical chairs" with the end-line losers being the default-swallowing bank/investors.

FURTHER, while rents will have a temporary flattening pressure from the current income and unemployment depression, the ensuing inevitable monetary price inflation will have no choice but to flow "downhill" to the lowest common denominator of consumption; the housing rents.

THE WAY I READ THIS CHART is that Gold is actually on a significant DECLINE in recognized advantage as a hard asset, in comparison to real estate. This is important to note as we approach the inflationary times ahead... once a new trend is obvious to all, it is generally too late to get on the most advantaged train. When (if) gold reaches its historical bottom, relative to real estate, it may be long past the times when the deepest "desperation discounts" have been available to real estate investors.

Trying to leap into Gold (versus Real Estate) at THIS POINT is tantamount to "trying to catch a falling knife." Unless the FEATURES of gold (as expressed above) are more valuable than the yield and future inflation hedging power of leveraged real estate... then the latter is the forward-looking choice.

As Wayne Gretzky "The Great One" is often quoted as saying; "Do NOT skate to where the puck currently IS... instead, skate to where the puck is GOING!"

Dave Donhoff