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Debtwatch No. 25: How much worse can “It” get?

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  • #61
    Re: Debtwatch No. 25: How much worse can “It” get?

    Jimmy this probably came up earlier, but if gold prices double while nominal incomes remain steady for ten years is it your argument that housing prices would double (assuming we were at equilibrium)?

    That just doesn't feel right to me. I think it'd be much more likely that you see housing track incomes (assuming the inventory overhang is worked off) and become ~50% cheaper in gg.

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    • #62
      Re: Debtwatch No. 25: How much worse can “It” get?

      Originally posted by WDCRob View Post
      Jimmy this probably came up earlier, but if gold prices double while nominal incomes remain steady for ten years is it your argument that housing prices would double (assuming we were at equilibrium)?

      That just doesn't feel right to me. I think it'd be much more likely that you see housing track incomes (assuming the inventory overhang is worked off) and become ~50% cheaper in gg.
      You raise a good point, Rob. It is possible that the ratio could continue to drift further into uncharted territory. However, assuming moderate 4% inflation over your 10 year period, Americans would suffer a 33% reduction in standard of living, causing a variety of readjustments to occur. This would result in an increase in the cost of housing per sf.

      I see it playing out like this. New construction and major renovations remain unprofitable, as existing homes and foreclosures sell well below replacement cost. Many run-down properties are abandoned and eventually torn down. Large homes are subdivided and/or families share a house and the associated expenses. As the population continues to grow, excess inventory is sold off and prices begin to rise. When construction resumes, the focus is on small, low cost units. Individual outlays for housing remain the same, but the square footage that money buys declines.

      My view is that long term, housing outlays per person will track incomes, and price per sf will track inflation. Gold should also track inflation and other commodities over the long term, though it could outperform in a shtf scenario.

      So, eventually gg/sf will revert toward the mean, though it could remain artificially low in the aftermath of the housing bubble and the rebuilding of the US economy.

      -Jimmy

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      • #63
        Re: Debtwatch No. 25: How much worse can “It” get?

        So...

        The price for each marginal square foot is less than the one before it on average, so as inflation reduces the average home size the price/square foot rises in nominal terms. Prices don't fall, what you get for that price falls?

        In the long run that makes sense, but in the near future, until new construction starts up in earnest again, I suspect we'll see your ratio fall into uncharted territory. Especially given the relatively high odds for the next shoe (EJ's size 10.5 Poomas for example) to drop and gold to do a 70s style spike.

        Maybe it's a failure of imagination, but I can't see how enough homes are subdivided to reduce the average home size significantly before new home construction fires up again.

        And families moving in together would actually increase inventory in the short run, delaying that day even further.

        Likewise another huge wave of foreclosures or jingle mail.

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        • #64
          Re: Debtwatch No. 25: How much worse can “It” get?

          i don't think most single family houses are laid out well for subdivision, nor do i think that zoning laws will go away easily. otoh, i can see both multi-generational extended families living together, and unrelated people sharing houses or taking in boarders.

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          • #65
            Re: Debtwatch No. 25: How much worse can “It” get?

            Originally posted by WDCRob View Post
            So...

            The price for each marginal square foot is less than the one before it on average, so as inflation reduces the average home size the price/square foot rises in nominal terms. Prices don't fall, what you get for that price falls?

            In the long run that makes sense, but in the near future, until new construction starts up in earnest again, I suspect we'll see your ratio fall into uncharted territory. Especially given the relatively high odds for the next shoe (EJ's size 10.5 Poomas for example) to drop and gold to do a 70s style spike.

            Maybe it's a failure of imagination, but I can't see how enough homes are subdivided to reduce the average home size significantly before new home construction fires up again.

            And families moving in together would actually increase inventory in the short run, delaying that day even further.

            Likewise another huge wave of foreclosures or jingle mail.
            You make some good points, Rob, and it may very well take decades for median square footage to reduce to a size commensurate with American incomes. There is a reason you don't see every Jamaican living in a 2500 sf home that costs $10k. In the long run, prices reflect land value plus replacement cost, which is determined by commodity prices and labor costs. Incomes determine how much house (sf) one can afford.

            Another possibility we haven't mentioned is that gold's price stagnates or drops.

            I will also point out that by following the chart's signals, one would have made a ton of money over the past 80 years. Of course, since gold ownership was banned for half that time, it would have been tough to pull off.

            1930 Sell housing, buy gold
            1933-1945 Sell gold, buy housing
            1972 Sell housing, buy gold
            1980 Sell gold, buy housing
            2000-2005 Sell housing, buy gold
            2010? Sell gold, buy housing

            -Jimmy

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            • #66
              Re: Debtwatch No. 25: How much worse can “It” get?

              Originally posted by jk View Post
              i don't think most single family houses are laid out well for subdivision, nor do i think that zoning laws will go away easily. otoh, i can see both multi-generational extended families living together, and unrelated people sharing houses or taking in boarders.
              This makes sense. The largest new homes in my county are in subdivisions with fierce deed restrictions and active HOA's (mine recently insisted I paint my mailbox). Subdividing homes in these areas won't happen unless we get close to mad max conditions. I agree also that they don't lend themselves to subdividing. Just one kitchen, entry doors and foyers all wrong....muliti-generation is more realistic.

              Jimmygu3 trade-gold-for-housing argument is quite convincing.

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              • #67
                Re: Debtwatch No. 25: How much worse can “It” get?

                It was my impression that houses have gotten a lot bigger over the past 20 years. I do not think price per square foot is an accurate measurement now. In fact, it might even be skewed further in a cheap peak oil environment: Bigger house = higher energy expenses = less money for a big, fancy mortgage. The supply of wacky mortgages as gone down too. I expect that graph to overshoot by a lot, especially over the next 2 years. If there is any justice left in this country, I want to get a cheap house.

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