In today’s economy we can’t measure value properly anymore. It starts with the confusion around inflation. Many years ago inflation numbers were real. Back then to determine value, you simply took the current price and measured it against past prices including the rise in inflation. But now that inflation is a political number, the inflation number published are not real. In fact, they are fake. I would like to go shopping where the FED takes their prices from to calculate inflation.
But if you cannot use inflation numbers, how can you determine what is something worth?
Currently there is the Consumer Price Index (CPI). This number is totally manipulated. The Federal Reserve Bank just make it what they want it to be and no one questions it. The problem is that it is a very important number. All cost of living adjustments are all based upon the CPI.
Right now, everyone is saying the real estate prices are through the roof. But maybe they are not. When we compare real estate to real goods such as gold and oil we can see exactly where real estate stands. If you go back to 1970, when we were still on the gold standard, the median price for a house was approximately $22,000. Back then gold was $35. So, if you wanted to buy the median price house in gold, it would take 646 ounces of gold (22,000/35). Today, the median house price is about $348,000. Gold is almost $1,800. To buy a median house today, cost you only 194 ounces of gold (348,000/1,800).
In other words, the value of a house today is less than a third the price it was in 1970 when priced in gold.
In 1970 oil was only $3 a barrel. so a median house of $22,000 would had set you back 6,700 barrels of oil. Today, oil is roughly $70 a barrel and the median house price at $348,000. So today you would only have to fork out 4,971 barrels of oil to purchase an average home. So priced in oil, houses are cheaper, too.
There are two things that value everything on earth: scarcity and utility. If something is scarce, it’s going to have more value and if something is useful, it’s going to have more value, too. So, gold and oil is scarce and it is useful.
We can conclude that it is cheaper to buy a house in gold or oil today, but more expensive to buy it in dollars.
So, is the real estate market too expensive? If you only think in dollars terms, then it looks pretty expensive. But if you compare it to a whole variety of other commodities, you might find it is still cheap. It depends on the commodity you’re comparing to.
Sven Franssen