A House Made of Silver

This is the fifteenth post in a series entitled Currency, Money and the Economy.

For those of you who are struggling to figure out how to purchase a home, here is an interesting exercise. In previous posts, we created a ratio between the Dow and gold and found a pattern. We are now going to create a new ratio called the Home Price in Silver. For this exercise, we take the average median home price in the United States starting in 1970 and divide it by the price of silver. In 1971, the price of a median home was $27,500 and the price of silver was $1.39 an ounce. This means you could buy a house for 20,000 pieces of silver. Inflation took hold and by 1980, the median home price increased to $58,800, but the price of silver rocketed to $52.50 an ounce. Therefore, it only took 1100 pieces of silver to buy a home. Growth took off again and in 2003, the median home price was $179,000 and the price of silver was $4.88 an ounce. Therefore, it took whopping 36,700 pieces of silver to buy a home. With the housing bubble now burst, housing prices are returning to historical norms. In 2008, the median home price was $199,000 and the price of silver was $14.99 an ounce. That means a median house today will cost 13,300 pieces of silver and the ratio is falling.

If we extrapolate the trend similar to what we did with the Dow/gold ratio, at some point the cost of a median home will drop to 1100 pieces of silver again. 1100 ounces of silver currently costs $19,000.

In scenario #1, the price of silver rose to $100 using a conservative silver/gold ratio of 10. 1100 ounces of silver at $100 will be priced at $110,000. Since we are in a deflation scenario, house prices dropping 50% would not be implausible. Therefore, you could buy a house for 1000 pieces of silver.

In scenario #2, the price of silver rose to $600 using a conservative silver/gold ratio of 10. 1100 ounces of silver at $600 will be priced at $660,000. Since we are in a stagflation scenario, house prices will essentially stay flat at $200,000. Therefore, you could buy a house for 350 pieces of silver.

In scenario #3, the price of silver rose to $3000 using a conservative silver/gold ratio of 10. 1100 ounces of silver at $3000 will be priced at $3,300,000. Since we are in an inflation scenario, house prices will rise. However, even if the median house price rose by a factor of five, it would still cost “only” $1,000,000. Therefore, you could buy a house for 350 pieces of silver.

Imagine putting away just $20,000 right now in silver (1100 ounces) into a vault or safety deposit box. If any of the three disaster scenario strikes, you would be able to sell the silver and purchase a home outright, without a mortgage. For those of you with a home already, you could pay off the mortgage. In fact, in the last two scenarios, that $20,000 could actually buy you two houses (one residence and one rental property). Now that is something worth contemplating. And that was just using the conservative silver/gold ratio.

Now those who live in the San Francisco Bay Area know that the median home price is just a “tad” higher than elsewhere. Therefore, simply readjust the figures to see how much silver you would need to pay for your dream house.

Also, for those parents with small children trying to figure out a way to pay for college costs that are already spiraling out of control, a similar exercise can be performed.