Saturday, April 24, 2010

U.S. House Prices Will Continue To Fall

Putting matters, whatever they may be, in perspective is always important. It is a buffer against our own biases and the biases of others. The knowledge and wisdom necessary to process the perspective is equally, if not more, important. Against this caveat, consider the following graph which looks into the evolution of the median single-family home price in relation to the price of gold.

Chart of the Day commentary puts it as follows:

[The] chart presents the median single-family home price divided by the price of one ounce of gold. This results in the home / gold ratio or the cost of the median single-family home in ounces of gold. For example, it currently takes 153 ounces of gold to buy the median single-family home. This is considerably less that the 601 ounces it took back in 2001. When priced in gold, the median single-family home is down 75% from its 2001 peak and remains well within the confines of its five-year accelerated downtrend.

As mentioned in previous posts, gold is a measure of long-term wealth; therefore is a good relative indicator when comparing different products/service on an intertemporal basis. Based on the trajectory of the graph we are headed to levels seen around 1979-1980. This means that house prices will fall further.

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