Satoshi's Sidewalk #19: Bricks of Gold, Part 1
Housing prices have oscillated when priced in gold the last 120 years. Priced in dollars, it's up, up, and away! All denominators matter.
Welcome new subscribers!
There are lots and lots of new subscribers for this morning’s issue thanks to Marty’s shoutout in yesterday’s Bent (sup freaks!). I was humbled to learn Marty read my little newsletter as his writing is partly responsible for my writing.
Wild, I say! As my buddy Matthew said, you never know who’s reading!
Here on Bitcoin Urbanism I explore the second and third order effects of bitcoin, as hard money, will have on the built environment - planning, design, construction, materials, lamp posts, and whatever else strikes my fancy.
Since you’re new around here, check out What is Bitcoin Urbanism? to get a more in depth overview of our purpose. For my first attempt at being a thinker (I’m more of a drinker) about real estate and bitcoin, try Bitcoin Urbanism #2: Follow the Money, Part 1.
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Monday saw another corporate entrant to the bitcoin space with Norwegian company Aker ASA’s new bitcoin subsidiary, Seetee. They came in hot with the following tweet:
Two tweets further into the thread was a link to the shareholder letter written by majority owner Kjell Inge Røkke, which you should read (and not just because his name and my name are similar). I did and became extra bullish.
One paragraph early on in the letter caught my eye, which brings us to the point of today’s issue:
Pricing real estate in gold is an effective thought experiment for investing purposes but not for tracking the cost of homes across time. This would be effective if the economy operated on a gold standard but that hasn’t been the case since 1971. Even before then, the gold standard was on shaky ground from 1933 to 1971. Investors have options when placing capital for preservation purposes whereas those shopping for a home today (or anytime post 1933) are looking to buy a durable good which provides shelter. Labor ain’t paid in gold either. Capital preservation is higher up on Maslow’s Hierarchy of Needs, where as shelter is among the most basic of needs.
Looking from the gold angle home prices have been all over the place during the 20th century. Readers of The Bitcoin Standard may recall this time period with interest. It was the start, in earnest, of central banking (or monetary nationalism) around the world. Not the full fledged central banking of today, but the origins. The chart above puts the cost of homes today slightly below 200 oz per home. A couple interesting things to note are 1) the monetary expansion of the 1920s and subsequent Great Depression, 2) the end of WW2 and the beginning of the Suburban Experiment, 3) 1971 and the subsequent bull market in gold, 4) 90s credit expansion, and finally the 2000s gold bull market. Overall, the chart is a good way to illustrate the 20th century was a mess for the cost of housing in gold. Goods should not experience dramatic price changes without corresponding changes to the difficulty or ease of producing such goods. Or unless technological breakthroughs occur and wreck shop.
If home prices went from slightly over 200oz to over 600oz and back down below 200oz - what gives?
The search for an objective price-measuring tool persists. Gold performed admirably for thousands of years and yet gold failed as commerce expanded globally and market speed increased. Paper notes were used to more conveniently split up the increasing purchasing power of the yellow metal. Final settlement became more difficult logistically and practically. Humans solve problems. These problems were solved by paper money which was more salable across space in a new global trade environment. Moving across space - the globe - was a breakthrough technology at the time.
For our concerns, the cost of homes should be denominated by either median household income or median hours worked. Some searching yields beneficial results. The internet is an awesome place.
Homes may be priced about the same in gold from 1920 to 2020 but the same cannot be said when pricing homes in US dollars. One-hundred years is a long time.
In 1920, a modest home could be purchased for $1,950 through Sears & Roebuck for self-assembly. Generally, labor is half the cost of a home - so let’s double the cost to $3,900 for a turn-key deal. The average family in 1928 made $2,500 per year (forgive me for comparing different years). Gold was $20.67 an ounce. A home cost approximately 189oz of gold or 1.56x the family’s annual household income.
The median home price for Q4 2020 per the St. Louis Fed is $346,800. Using our alternative denominators that cost changes to 182oz of gold ($1,897 per oz as of 12/31/30; or 203 at $1,712 per oz as of 3/9/21) or 5x the median household income (2019, St. Louis Fed). For those dear subscribers who abhor math, using median household income, purchasing a home today cost 3.21 times what it did 100 years ago.
In short, there is no objective, unchanging ruler to to measure the cost of goods over time which is not subject to changes in the rate of new supply, centralized ownership, or manipulation. Credit conditions which are controlled by central banks are no better, and in fact, create insidious, inflation-induced side effects. To add insult to injury, approximately 30% of the cost of homes today are directly attributable to government cost in fees, compliance, and time expenses.
Now apply the above information to the entire built environment. This puts the US real estate market, in my humble opinion, in the running for the greatest and longest running malinvestment in human history. China is fast approaching from behind with the CCP’s global initiatives, which is already expensive to build the first time as it is.
Enter bitcoin - now nobody ain’t got time for none of this. We’re already a bit long for today.
Stay tuned for Friday’s edition of Satoshi’s Sidewalk for Bricks of Gold, Part 2.
P.S. - for data masochists, here’s a good website to check out regarding housing costs.