Trashed Real Estate, Soaring Gold

The prop wash from Ben Bernanke's helicopters has yet to spread dollars on the struggling U.S. real estate market.  Gold, though, up over 30% in the last year, is a major beneficiary,

Three years ago a typical Florida house (Tampa area) sold for $240,000 and gold was around $450/oz.  Now the house value has been cut in half to $120,000 while Gold has tripled and is closing in on $1,350/oz.   It took 535 ounces of gold to buy the house in 2006, today it only takes 90 ounces.  Why such a large about face?

Since both houses and gold are "real", non-printable assets one might conclude either houses are extremely undervalued and/or gold is extremely overvalued.  Is it just a matter of time before the pendulum swings back and the gold/house ratio rises again?

Gold is very much a global commodity, of course, while houses are the quintessential local asset.  You can easily move a pound of gold or more around around the world.  The real estate goes nowhere.

U.S. real estate has very low liquidity right now.  Loans are difficult to get.  Anyone can buy gold in vaious amounts easily, either through ETFs such as GLD or SLV.  Physical gold is available in the form of bullion or coins at the local coin store or numerous web sites (Be careful)!  In 2006 all you needed was a pulse to get a real estate loan while precious metal ETFs were just coming on the scene.

Years ago I went to a real estate seminar.  One of the things we learned was how to value houses using the income approach.  The "rule of thumb": A good middle class 3 bedroom/2 bath/2 car garage house in a good (not great) neighborhood is a buy if it sells for less than 100 times the monthly rent.  For example, if the house rents for $800/month a price of $80,000 (or better) makes it a good buy.

So, with that in mind, how do things look today?  The above central Florida house, renting for $800/month, can again be had -- with some negotiation -- for about $80,000 or less.   In 2006 the house was valued at about $160,000 -- way above the "rule of thumb" above -- an obvious red flag to those who paid attention.

I believe real estate is now in the process of bottoming and will eventually follow gold higher.  Inflation, as evidenced by increasing commodity prices, now seems to be edging out deflation.  Real Estate appreciation will follow.  However, it will be slow due to liquidity issues and the poor U.S. economic recovery.

Disclosure: I own real estate, no positions in ETFs mentioned