Sunday, November 12, 2006

More on RealEstate, Gold, and the Dollar

I decided to post this older post, originally written about a month ago, after I learned that at least two people had seen my blog....effectively tripling my viewship (including myself)! :) So, here I go making sweeping statements, that will be sure to turn off enough of my "audience" so that our numbers can return to the low single digits.

This post is effectively "part II" to an earlier post that noticed the "funny coincidence" that my bay area home, purchased in June of 2002 and sold in June of 2004 increased in value by 29%....almost *exactly* the amount of money that gold increased during the same time frame.

The inference was that excessive money (and credit) creation, was stealthily inflating the US dollar into oblivian.

In this post I will revisit what happened to my house since 2004. I'd also like to "debunk" the argument that investing in real-estate (in the last two years) was an effective way to avoid dollar devaluation in an inflationary environment. says that my home has appreciated ANOTHER 29% since I sold. OUCH! --- left a lot of money on the table...or did I?

Gold prices have increased 65% during that same time frame.

So what is happening?

RE is not a great store of value because it isn't fungible and it has a purpose other than money or a store of value.

huh? what the h3ll does that mean?

Fungible, as I'm using it here, means nearly infinitely divisible, without losing it's per unit value. In other words, a gold bar could be cut in half and be worth 1/2 the value of the whole bar. Try that with a house.

Think of the prospector paying for a whiskey with a pinch of gold dust. Oil is another good example fungibility. Imagine trying to pay for a whiskey with a piece of sheetrock.

The intelligence that goes into organizing the parts of the house, means that the value of the whole is greater than the sum of its parts.

ok, so what? why is that important?

The absurdly inflated prices had already gone up so far past anyone's ability to pay (even using the most ridiculously dangerous loan products and non-existent loan standards) that they couldn't possibly keep pace with the speed of the "real" inflation in cash and credit.

Once people couldn't afford to speculate in single family residences in the most desirable areas using traditional financing, they were forced to keep the party going using more drastic tactics:

"suicide" loan products (excessive levering)? check.
Pool into partnerships for speculating? check.
Speculate in traditionally less desireable areas? check.
Speculate in condos? check.
Fraud? CHECK!!!! (more on this in a later post -- this has been the single biggest contributor to keeping the decline shallow to this point, in my opinion).

That unfortunately means if you are using houses to guard against easy money inflating the value of your portfolio away, you have a problem.

As we've discussed here before, the obvious outcome is first slowing sales, slightly dipping medians (as builders run out of incentives to add to the purchase price), inflating inventories, and "stuck" sellers. At this point, the mainstream media is so "all over" this story that it is probably getting a bit old -- especially if you are trying to sell and can't.

The story that is still being completely missed is that in "real" terms (inflation adjusted dollars) housing has already been tanking for the last couple of years. This will continue, and unless the fed increases the pace of credit expansion, the nominal (non-inflation adjusted prices) will continue to go down, creating problems for levered buyers of all classes.

As Soros has pointed out, housing is one of the most "reflexive" assets around (more on reflexivity in a later post) and the reason they run so hard and fast and long on the way up and the way down.

Ok, so your unsolicited advice of the day is to wait for (probably years) before buying any more residential RE. It will take a long time to correct down, and will only be a reasonable buy with PITI is near or below a breakeven proposition with renting a similar property, IMO.


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