ON HOUSE VALUES AND YOUR GREAT GRANDFATHER’S TWO DOLLARS

Depending on your age, it's possible that most of your life you've been assured that houses always go up in value; that real estate is a great investment because your wealth will increase as you pay down your house loan while the value of the property escalates year after year. Well…perhaps; and maybe not.

YOUR GREAT GRANDFATHER'S TWO DOLLARS

Imagine that your Great Grandfather had received a wonderful old musket from his great grandfather; and he thought that his great grandchild would appreciate a gift from him as well. So he opened his Sears Catalogue #110 and decided to leave you money for a .38 caliber double-action revolver. In a box he placed two one-dollar bills, which would cover the price of the gun at $1.75, plus 5 cents for five cartridges to load it, plus 20 cents postage for delivery to your door.

You open the old box and find a kind note from your Great Grandfather attached to the two one-dollar bills; at the bottom of the box he had placed the page from the 1900 Sears Catalogue with the gun and its description circled. You realize, of course, that the cost of a gun has gone into the hundreds of dollars. You won’t get your gun.

Wait! No. The gun did not go up in cost; the money went down in value. The truth is that the government, through the Central Bank (a private bank called The Federal Reserve), stole the value of your Great Grandfather’s money by debasing the currency through excessive use of the printing press. If you printed money it would be called counterfeiting. When the Central Bank prints money, the masses are told that it’s inflation.

BACK TO HOUSES

So instead of houses going up in value, the dollar has been going down in value. Economists call that currency debasement. Most folks think of rising prices as inflation, but it is simply a matter of an expansion of the money supply: Theft by the Central Bank (the private Federal Reserve) with the help of the Federal Government.

The dollar has value because of law (fiat). It is fiat paper (actually, mostly digits on computers). The Federal Government has dictated that a piece of paper printed and put out by the Federal Reserve must be accepted as money. Actually, private individuals do not have to accept dollars in exchange for their houses; but they do because they were brought up to accept a piece of paper as money.

HOUSE VALUES IN RELATION TO REAL MONEY

We know that some houses have gone up considerably more than the inflation rate; I'll explain about that shortly. Unfortunately we don't get good data from the government; the folks who figure inflation cook the books; they manipulate the figures to make politicians look better, and to keep the cost of expenses, such as Social Security, more affordable. You see, the lower the inflation rate, the less they have to increase the Social Security benefits to retired folks and all others receiving Social Security and welfare money.

To compare what house values have done during a certain time period, it's much better to compare house prices using real money: Gold.

For thousands of years gold has been used as money because it has all the characteristics necessary for its use as a medium of exchange. The Greek philosopher, Aristotle (384-322 BC) did a marvelous job of defining the characteristics of real money:

1. Durable: Money must stand the test of time and the elements. It must not fade, corrode, or change through time.
2. Portable: Good money needs to hold a high amount of “worth” relative to its weight and size.
3. Divisible: Money should be relatively easy to separate and re-combine without affecting its fundamental characteristics.
4. Intrinsically Valuable: This value of money should be independent of any other object and contained in the money itself, starting with rarity.

THE FIAT PAPER MONEY COST OF A HOUSE IN 1967

While attending college I worked for a small custom home building company starting in 1965; most homes were built by individual builders or small building companies in those days. We were building mostly starter homes, 1,000-1,200 square feet (s.f.) of living area, 3 bedrooms, 2 baths and a 2 car carport or garage.

The houses sold between $9,500 and $10,500 at the time. Those houses, in very good condition, are selling somewhere in the $100,000 and up range presently. One would be correct in saying that they have “gone up” in value 10 times, or 1,000%.

Let's examine a house that might have sold new for $10,000 in 1967 that, being in excellent condition, is currently worth $100,000. It has increased exactly 1,000% in value. Let's say that in 1967 your grandfather, a Colonel in the U.S. Army, was about to buy a $10,000 house, but he got transferred to France. When he got there he didn't want to put his $10,000 in a French bank. One of his officer friends offered to sell him some of the new South African Krugerrand one-ounce gold coins for $40 each; so he bought 250 coins from his friend.

The “real money” cost of that house in 1967 was 250 ounces of gold, or 250 Krugerrands: 250x$40 = $10,000.

THE VALUE OF THE HOUSE IN 2017

When you read this gold could be much higher—or it could have been manipulated down by the futures market; I would bet that won't last long—but as I write, a Krugerrand is selling in the $1,350 per coin range.

Your grandfather's 250 gold Krugerrands would be worth $337,500 in paper dollars today; had he bought the house, it would only be worth $100,000. The value of that house right now, in real money, is about 74 Krugerrands; 74 ounces of gold.

The number of gold coins that could have bought one house in 1967 can now buy three of the same houses and still leave some coins in the buyer's pocket. As the Federal Reserve continues to print dollars—or create dollars in their modern version of computer bits—the gold coins will continue to increase in fiat paper money value.

MOST HOUSES HAVE NEVER GONE UP IN VALUE

When you consider the above it's easy to come to the conclusion that houses have never truly gone up in value. Of course, I'm only referring to the house itself here. The land is an entirely different combination of circumstances.

LAND IS THE VALUE LEADER

You've probably been thinking that some houses went up in value many thousands of percent more than the real inflation rate. The reason for that is covered by the old cliché that real estate agents like to repeat: Location, location, location.

If you had been Juan Ponce de León, you wouldn't have given a plug nickel for a hundred acres of land on Miami Beach in the early 16th Century; you probably wouldn't have given a plug nickel for all of Galveston Island in Texas. As time passed and more folks arrived to those nice places, the price of land went up.

As population grows, land becomes more scarce, which makes prices climb. Population is not the only thing that moves land prices up. Wealthy individuals find the nicest areas and buy land to build big, expensive houses; some even create estates with lofty mansions. Business people build high rise buildings on the most desirable areas and land prices go through the roof. In those areas, location has shot house prices up.

Discounting housing where prices have gone ballistic due to circumstances caused by high-end buyers, it can be tricky buying in areas where prices are declining. Before buying, understand where prices are going in your region, town or city. If they are declining, is it possible that renting might be better and then you can put your savings in gold or silver. Maybe in some well-selected cryptos? Perhaps.

You must be on your guard about what you hear from people in the home selling business; that’s especially true if you hear news about exploding prices in currently-hot areas like Dallas/Fort Worth, San Francisco, Los Angeles, Toronto, Vancouver.

Prices are not going up in a lot of places. So that you don't end up underwater, especially on a property with a mortgage, you have to be a wise buyer. Start by having an exceptional understanding of your market. Don’t jump at the first house that catches your heart.

The last thing you want to do is buy a house that decreases in value as the money it will bring when you sell it has also decreased in real value.

Finally: If you’re young (under 80), always buy a house with the plan of making it a Golden Goose; you know the kind, the type that lays a golden egg every month. It’s called a rent house.

Follow me. I’ll have lots more to say about buying and selling in Hot and Cold real estate markets. Over 50 years in housing has taught me a few things I’d like to pass on.