Tuesday, November 9, 2010

Gold and Housing: an Interesting Thought

An interesting question: What do house prices really tell us? Let's take a look at average house prices, gold and their ratio.

First the average house price. We see this below:

We are back to where we were at the beginning. We always saw this as a bubble, or was it, was there something else going on, in the world of open economies are home prices relative or reflective of bigger things?

Let us look at gold. We show this below:

Generally no surprise here, it has exploded. It was flat for a long while then up it went. Again what does this mean in an open economy?

Now let us look at the ratio:

For a long while the ratio was flat or growing but over the past few years the ration has gone down by a factor of three. This seems to imply more than just a housing bubble, The home was to the American what gold was to others a hedge against inflation. House prices reflected the net present value of an inflating asset. One would assume that the ratio would be equally reflective, unless of course the underlying national economy is considered more risky that the international one. Houses reflect the US qua a stand alone economy whereas gold is reflective of a global economy. This observation seems to state that one sees the US faltering in the long run despite everyone else's position.

An interesting metric, and interesting speculation.