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Home Prices vs. Home Values

Interesting article about housing.

On June 3, Standard and Poor's issued the latest update to its Case-Shiller Home Price series.

The press release begins, "Data through March 2011 ... show that the U.S. National Home Price Index declined by 4.2% in the first quarter of 2011, after having fallen 3.6% in the fourth quarter of 2010. The National Index hit a new recession low with the first quarter's data and posted an annual decline of 5.1% versus the first quarter of 2010."

Then comes the key statement: "Nationally, home prices are back to their mid-2002 levels."

This means that on the average, a home in the U.S. that was purchased for $200,000 in mid-2002 would have sold for about the same price two months ago. So after owning the home for almost nine years, you could sell it and break even – no capital gain nor loss, and all of the cash you originally invested would be returned to you.

But the dollars returned are not the same dollars that were invested! The U.S. dollar of mid-2002 could buy a lot more than the spring 2011 model... A barrel of crude oil cost $27 then, but about $100 now. A gallon of gasoline was $1.43 then, but $3.90 now. To purchase a shopping basket of food totaling $88 in mid-2002 would now ring the register for $232. An ounce of gold was around $315 back then, but over $1,400 at the end of Q1 2011!

So that house may have the same dollar price, but it does not have the same value.

  • July 07 2011 - US
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Answers (6)

lol... nice article. The author's numbers are quite convincing, but such speculative fantasy usually is.

All countries have their own currency, or "monetary unit". In the U.S., we call that unit a "dollar". Under a true gold standard, there is a fixed rate at which 1 dollar = 'X' amount of physical gold, and dollars could be exchanged for real gold at any time by anybody. Thus, a government on the gold standard must actually possess enough physical gold to back up the dollars it puts into the economy. This therefore limits how much "money" can actually be in circulation at any given time.

Most of the major-developed countries have been on the gold standard in the last 200 years, and the gold standard failed for every one of them. The biggest reason is international trade. Look at today... Say the U.S. is on the gold standard, and China is not. The U.S. buys tons of stuff from China, while China doesn't buy much from the U.S. For all the stuff China is selling us, it has the right to demand payment in physical gold. As the U.S. gives more and more gold to China, the U.S. must then remove 'X' amount of dollars from circulation because it can no longer back up those dollars. Limited dollars means that the population will save rather than spend, thus the economy slows down. In short, China could manipulate the economy of the U.S.

  • July 07 2011
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This tactic, used by non-gold standard countries against gold standard countries, has been used many times in the past, and is why the gold standard system fails. Even the gold exchange standard fails because of this. In the 1960's, France used this tactic (trading dollars for gold) against the U.S. in order to limit the U.S.'s economic influence overseas. The actions of France, combined with our debt from the Vietnam War, is what led Nixon to end the practice of direct dollar-to-gold convertibility.

The scenario of a depressed economy, combined with the outrageous govt debts from WWI, is what forced Britain, the U.S., Australia, and others to abandon the gold standard before. The U.S. was hurting so bad that FDR issued Executive Order 6102 in 1933, and Congress passed the Gold Reserve Act in 1934... which made it illegal for U.S. citizens (and the Federal Reserve) to own, possess, sell, or trade gold and gold certificates... thereby forcing all gold to be turned over to the federal government. The government then jacked up the price of gold to nearly double what it was in order to continue paying off it's debts.

The great economist John Maynard Keynes was one who argued against the gold standard. Many economic historians blame the gold standard for prolonging the Great Depression, and historical data proves that the earlier countries left the gold standard, the more quickly their economies recovered from the Great Depression.

The gold standard has been historically proven, time and time again, to be a failure. So an article that tries to convert home values into the gold standard in order to prove that homes are worth less... proves nothing.
  • July 07 2011
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Keynesian Economics is what has gotten this country into a clusterf*ck!  So please, anyone who refers to Keynes as "great"......well, everything you say is mute.  

The Gold standard a failure.....OMFG......seriously......Gold has been money for almost all of civilization......we got off the gold standard in 1972 and it has been downhill ever since. 
  • July 08 2011
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"Keynesian Economics is what has gotten this country into a clusterf*ck! ... ...we got off the gold standard in 1972 and it has been downhill ever since." - Lady Chattel
Please check your history, dear.  The U.S. went off the true gold standard in 1934, as I described above, and went off the gold exchange standard in 1972.
http://www.npr.org/blogs/money/2011/04/27/135604828/why-we-left-the-gold-standard
http://www.cmi-gold-silver.com/gold-standard-inflation-fiat-money.html

Keynesian Economics didn't come around until the late 1930's, after most industrialized countries had already abandoned the gold standard, and the U.S. stopped using that mode of economic thinking in the early-to-mid 1970's.  So Keynes isn't the one who put us in this hole.
  • July 08 2011
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We can argue till the cows come home.......but throwing money at something hoping it will stimulate that something.......well, that is Keynes at its best....hows that 800 Billion bailout doing for the economy? 
  • July 10 2011
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Bailout - For the last 30+ years, we've been engaging not in Keynesian Economics, but rather Trickle-down Economics (a.k.a "Reaganomics")... the idea that if we give money and tax breaks to the rich, it will trickle down to the middle class and the poor. It is now obvious that that idea doesn't work. Over this time-frame, more people have slipped into poverty, standard-of-living is worse, buying power is worse, and income inequality has skyrocketed. The rich continue to get richer, and banks and big corporations consistently smash records on their quarterly profits. If you ask one of the rich, they'd say the bailout was quite a success.

Throwing Money - This idea can work, but in order for it to work we have to have honest leaders running the show. Our government throws money at the rich and the special interests, who then hoard the money, and things continue to get worse for everybody else. If you threw money at the lower and middle classes, what would they do with it? They'd spend it!! The increased demand for goods and services would outpace supply and thus create more jobs. More people with jobs would mean yet more money to spend, increasing demand yet again, and also increasing the revenue the government collects in taxes.

Consumers can't spend money if they don't have an income, so until decent-paying jobs are created, the economy will not get better. FDR understood this concept. Although he favored a balanced budget, we were in the midst of our greatest crisis, so he increased govt deficit spending with his various "New Deal" programs.  In his first term, FDR slashed unemployment by 10%, and increased industrialy production by 56%.

Side-note (Lady C should enjoy this):  FDR met Keynes in 1934, did not like him, and overall rejected many of Keynes's theories.  He considered Keynes a mathematician rather than an economist.

  • July 12 2011
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