Occasionally I read something online that sounds too convenient to be true. Recently I read that you can buy a house today for the same price as 1920 if you are paying for it in gold. That statistic didn’t sound right, so I decided to verify it. While data from 1920 is not as reliable as today, the best I could find is that the average home cost about $6300. With a gold price of $20.93/ounce, it would have taken 301 ounces of gold to buy the average house in 1920. Could you buy the average home today with same 301 ounces of gold?
The average price of gold in the third quarter of 2023 was $1928/oz. 301 ounces of gold would be worth $580,300. According to the St. Louis Fed, the average price of a new home in the third quarter of 2023 was $513,400. Indeed, you can buy a house today for the same price as 1920 when paying in gold.
Does this mean housing is a good investment to hedge against inflation? No. There are several things to consider when comparing a house from 1920 to today which shows it has lost relative value. First, the average size of a home in 1920 was just over 1000 square feet compared to just over 2000 square feet today. Additionally, a typical home in 1920 was far less desirable than a home today when considering features such as a lack of air conditioning, poor insulation, lead paint, no indoor plumbing, and no electricity.
To get a much better home today for the same price in gold, there are only a limited number of potential causes:
- Gold prices are too high today relative to the dollar. Possible, but I won’t venture a guess on the future price of gold. Since 3Q23 when the house prices were measured, gold prices have increased an additional 20%.
- Home prices were expensive in 1920. Likely. Significant general price increases had occurred between 1916 and 1920 due to World War 1. Home prices had jumped even though the gold was pegged at $20.93/oz.
- Home prices are cheap today. Unlikely. The average home price relative to median income is currently the highest it has been in at least 75 years. This does not mean prices cannot go higher relative to income as has been demonstrated in Australia and Canada.
- There has been long term deflation in housing relative to gold. Very likely. Because of innovation, the long-term trend for physical items tend to drop in price in real terms. Due to innovation like the industrial revolution, general items in 1900 were half the price they were in 1800 even though the price of gold had remained flat. This is a key reason why a physical asset like a house is a poor long-term hedge against inflation.
Another problem when considering housing as an investment against inflation is ongoing costs. These include maintenance, property taxes and insurance. Average home maintenance costs are about 1% of the home’s value, average property taxes are 1.1% and average insurance is about 0.3%. If you have 2.4% fees compounded over 30 years, you can expect to pay as much in maintenance, taxes, and insurance as the original purchase price of a house. If you have a financial advisor that recommended an investment as a hedge against inflation that comes with 2.4% annual fees, you should find a new financial advisor.
Does this mean you shouldn’t buy a house? No. The key benefit of buying a house is that you avoid paying rent for a basic need. This shifts the economics of home ownership. It also sets the standard of how much house you should buy. If you would not be willing to pay more in rent for a home’s feature or size, you shouldn’t pay extra to purchase it either. The economic value of buying a house rests in the rent you avoid paying, or the rent you receive from the home.
