John Tamny highlights an interesting fact about real estate in this article (which is really about the confusion of Joseph Stiglitz):

More realistically, weak currencies are the biggest drivers of nominal home-price gains, and for evidence we need only study Richard Nixon’s second presidential term and Jimmy Carter’s lone term to find that much like this decade, housing was frothy under both. Stiglitz argues that Greenspan had a role here for turning on “the money spigot” with “full force” earlier in the decade, but then money supply is vastly overrated as an indicator of a currency’s direction. For evidence, we need only compare the ‘70s and ‘80s when money creation by the Fed was the same, but achieved opposite results. If Stiglitz is looking for someone to blame here, he would do better to finger a Bush Treasury that embraced a weak dollar with great vigor.

It is hard to pinpoint nationwide movements in home prices but this data seems to support Tamny’s thesis that it is the value of the dollar that affects home prices and not interest rates. During the 1970s, a time of a generally weak dollar, the median home price in the US rose from $17,000 to $47,200. That’s a rise of 177%. During the 1980s, the dollar went on a wild ride, rising strongly in the first half and falling back in the second half. Overall, the dollar changed little in value from 1980 to 1990. The median home value rose from $47,200 to $79,100, a rise of 67.5%. In the 1990s, the dollar generally rose, although that was mostly in the second half of the decade. Median home values rose from $79,100 to $119,600, a rise of 51%. This decade, as everyone knows, the dollar fell strongly as in the 1970s. Median home values rose from $119,600 to a peak of about $215,000 in 2006 (they’ve since fallen back some as the dollar has risen). That’s a rise of 80%.

Obviously, the correlation is not exact and there are other factors which affect home values but in general the relationship between home prices and the dollar seems solid. If that is true, what does it say about home prices going forward? It is hard to see how the dollar can rise given the massive issuance of Treasuries that will be needed to fund all the bailouts and stimulus packages coming out of Washington. Of course, every other country on the planet is doing something similar, so maybe the dollar won’t weaken much against other currencies. It may be that all currencies fall against that other monetary unit – gold. If that is true, it makes sense that house prices would rise. The best way to protect your assets in an inflationary environment is to own real things such as commodities and real estate.

Who exactly is going to buy houses right now and move the price higher? Unemployment is rising and obviously it is difficult to get a mortgage if you don’t have a job, so it is hard to see home sales and prices rising. It is interesting to note though that the unemployment rate in the late 1970s was higher than it is now and home prices rose then, so somebody was buying houses then. Were they investors who were buying houses to rent? That seems a likely explanation.

I will not make any predictions about home values, but with the Fed pushing interest rates down and the dollar falling, it wouldn’t be a surprise to see prices start moving back up.

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