Source: Bloomberg’s Chart of the Day, Federal Housing Finance Agency



Here is something I never would have guessed at, via Dave Wilson of Bloomberg: If you want to be hedged against the risk of a pickup in inflation, you would be better off buying houses than gold.

That’s according to Michael Hartnett, chief investment strategist at Merrill Lynch. His chart (above) shows the U.S. house-price index and the price of Gold since 1995.

According to Bloomberg, “Home prices rose 6% through the end of last year from their low in the second quarter of 2011. Q1 reading is due May 23. Prices in 20 of the largest U.S. cities increased 0.4 percent through the first two months of this year, according to the Standard & Poor’s/Case-Shiller index.”

As houses became more expensive, gold got cheaper. Its off as much as 31% from its September 2011 peak of $1,923.70 an ounce.



Houses Surpass Gold for Hedging U.S. Inflation
David Wilson
Bloomberg May 3 2013

Category: Gold & Precious Metals, Inflation, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

54 Responses to “Which is a Better Inflation Hedge, Gold or Houses?”

  1. biotrekker says:

    Actually, these just look like two bull market charts about six years out of phase with each other.

  2. jaymaster says:

    And to really goose the hedge, you can buy the house with a 30 year mortgage with an after tax rate close to (or even less than!) inflation.

  3. They are both good hedges, especially because of the decorrelation! Housing has the potential advantage that you get to be short bonds via the mortgage, for a double benefit if interest rates actually rise…

    In fact, if you take a Monetarist-style view of inflation as being a “money and credit” phenomenon, the rise in house prices due to the housing/credit bubble WAS inflation… everything that has happened since then has just been to ratify that inflation by avoiding any reduction in total systemic credit. Because the people, the government and especially the Fed and the banks couldn’t stomach the consequences of letting the fraudulent credit bubble collapse of its own weight. That’s one reason why we’ve had such a lousy recovery and are stuck in an unsustainable economy right now… the underlying economy hasn’t grown enough to support the debt levels that were built on top of it. And the financiers are making out like bandits while the rest of us are struggling to pay interest and pay down debt while praying that our collateral recovers in price…

  4. P.S. The discerning viewer will have noted that housing only went up 2x in price (so far), whereas gold peaked after about a 6 gain (so far).

  5. garo says:

    There is so much wrong with the reasoning of Mr. Hartnett I am surprised this passed your sniff test Barry.

    1. Look at the y axes. Gold has gone from approximately 400 to 1460 and the house price index has gone from 110 to 190. It is simply dishonest to compare two quantities with different axes in this fashion.
    1b. Yes you could use a beta to adjust the comparison. But we are given no information or reasoning as to why the beta being implied in this chart is the correct one.
    2. 18 years is hardly enough time to gauge how good a hedge something is against inflation. Especially since both instruments being compared have been in bubble territory in those 18 years.
    3. Past performance is no guarantee of future results.

    Will houses beat gold in the next 6 month, year, 5 years? You guess is as good as mine. But I sure as hell am not putting on a spread trade here.

    PS: If you are still at you bloomie, you could rustle up a 50 or 100 year chart for perspective. I would have done so myself but am done for the week.

  6. thetruthseeker says:

    Personally, I think that gold priced in dollars will move quite a bit higher in the next 2-5 years. This being said, I think many gold supporters do not understand that gold is not necessarily an inflation hedge per se. There have and will continue to be periods of inflation during which the price of gold fairs poorly. Gold is, and has been historically, a hedge against governments and central banks. This is the main reason for owning it as part of one’s financial assets. With central banks unleashing ever greater amounts of liquidity into the system globally, I believe that having a decent sized position in gold/silver makes sense.

  7. deitzcpa says:

    Holding costs would greatly impact this comparison…

  8. bfarzin says:

    Housing has the additional advantage of leverage. For a primary residence in the US, you get 5:1 leverage and you owe back in nominal dollars. In an inflationary environment you are leveraged in the right direction.

  9. wally says:

    In all the angst over housing people seemed to forget what a great deal a sub 4% mortgage on a fixed price purchase is over the long run. 20 years from now today’s payment level will seem dirt cheap… and you will have deducted part of it plus real estate taxes for all those years.

  10. Global Eyes says:

    Gold is a better inflation hedge because of its instant liquidity, either via organized markets or at border crossings where chaos is the norm.

  11. BennyProfane says:


  12. AHodge says:

    if both these do bubble overshoot.
    as housing did and gold probably did, neither one is a solid hedge,
    stuff hyped with QE like other commods cant be so good a hedge anymore
    excep maybe like super long term 20 years
    I like housing now for at least 2-3years, and will likely look even better if theres inflation
    not that we are gong to get it
    TIPS might have some monor problems but might still be best

    • Long term TIPS not so good – Uncle Sam controls the inflation ruler, and will reduce it (further) if needed.

      Short term TIPS not so good either – unless you want to lock in your losses vs. even the low CPI.

  13. b_thunder says:

    1. What’s so special about 1995? Why not 1994 or 1996? I’d be more impresses with the result observed in series from 1913 (100 years) or since WWII.
    2. Gold , even after recent pullback, since 1995 gold has at least tripled ($400-ish to $1450), housing is up less than 100%
    3. “As houses became more expensive, gold got cheaper” – buy high (houses) or buy low (gold?)
    4. Without the Fed and Easy Al’s manipulations housing wound never reach the level it has in 2006. Without the Fed support it would also fall much further after the 2007 bust. But so is gold: without “activist” Fed gold would never trade in in the $300-$1900 range over the last 12 years. So basically I cannot say which would outperform the other. It’s all up to the 12 “masters of the monetary universe”

    • 100 year charts can be useful, but that doesnt mean EVERY CHART needs to be century long.

      Without the Fed and Easy Al’s manipulations, both Gold & Housing likely would not have spiked in the 2000s — the question is over time, which is the better hedge?

  14. Pantmaker says:

    The true test will be to see how each reacts in the back half of this decade when inflation makes its real move. This is just the dress rehearsal.

  15. W T F says:

    The time frame is not even 20 years. Why so short?

    Historical gold prices are available for decades. The Case-Shiller home price index goes back to the turn of the 20th century.

    Now that would be a useful comparison: gold prices vs. the Case-Shiller home price index since 1900.

    Barry, what were you thinking when you posted this? Or is this one of your Friday ironic postings?

    W T F

    • flakester says:

      Why such a short period indeed.
      At least do a Dow vs. gold since 1995 for extra amusement.

      • I) Its a comparison between Houses & Gold, not Equities.

        2) Do you recall how Gold did over the prior decade or 2? Not very well. Going back to 1990 or 1885 makes this look even worse.

      • flakester says:

        1) Given that one went up about 2x and the other about 6x, I thought that Dow vs. gold was equivalently amusing.

        2) And the decade and a half before that the Dow did quite poorly too. Picking the date range that’s used can show almost anything is a better hedge, and that includes housing or the Dow or even gold.

  16. cfischer says:

    Wally, I think current financing rates are very much priced into home prices. If 30-year mortgages rates went back up into the 6-7% range, I’d expect to see a 20% downturn in pricing. For many people, it’s still the “size of the payment” that matters – whether that’s a $200,000 house at 6.5% or a $300,000 at 3.5%.

    Barry – what kind of inflation? I’d bet wage inflation, normalized against interest rates, would track better than commodity inflation – though a component of commodity inflation (wood,copper,etc.) factors into new home prices.

  17. David Merkel says:

    Looks like the two would be a better inflation hedge together.

  18. wally says:

    “If 30-year mortgages rates went back up into the 6-7% range…”

    When that happens. I expect there will also be a higher level of inflation… which also means rising wages. I doubt very much that you will see a big drop in house prices as mortgage rates rise. Historically that has never been the response.

  19. WFTA says:

    I’d say putting a stop-loss order on XOM/WMT/JNJ is a better hedge than either, but you can live in a house and you have to live somewhere.

    Gold ,though a poor hedge in my opinion, can get someone to sleep with you in your house.

    Have a swell weekend.

  20. [...] Ritholtz, a new gold-hater, highlighted a Bloomberg chart of the day which compares Gold against housing prices. The conclusion is that since 1995, housing has been a [...]

    • You guys crack me up!


      BR: Update: March 5, 2014

      EMAIL March 5, 2013: I edited my description of you to make it more accurate.. Rather than a gold hater you are just someone taking delight in its drop.

      That being said, I used to follow your blog back when it was great 7-8 years ago.. Now you are so smug you can’t even admit when you are totally wrong…like in this post.. And note my analysis, I’m not some fanatic who thinks of manipulation or thinks Gold should go up all the time.

      MY RESPONSE: March 5, 2014 You are one of the many emotional traders who refused to recognize risks in this trade. You made this comment one year and nearly 20% ago. I hope you are less rigid than you were last year.

  21. Smashy says:

    People say Gold is an inflation hedge, I don’t see it. Is it in an inflation hedge because the cost getting it out of the ground should rise with the rate of inflation? There are whole periods of time where the cost per ounce is less then the cost to get it out of the ground.

    Housing on the other hand I do see. People generally are comfortable in paying X% of their income in rent or mortgage and wages rise over time with inflation. You have several valuation metrics from which to value a home and so you have several reality checks as well. Where with Gold, you don’t have any metrics just last priced paid.

    • rp says:

      “People say Gold is an inflation hedge, I don’t see it.”

      You’re thinking rationally. Try to be more like this guy:

      BTW, that’s from 2002. It took less than 10 years to go from mainstream spoof to where we are today: a comment on the first page of youtube referencing “fiat”.

      So take a look around. People are always laughing at the next bull market.

  22. holulu says:

    How that chart would look like if you factor in anual 2-3% “carry on” cost of real estate.
    chart is misleading.

  23. Moss says:

    So which was the bubble.. looks like housing to me. Can’t really dollar cost in to a house.

  24. Non Sequor says:

    Housing oughta be a good inflation hedge, after all, it’s 40% of CPI.

  25. chartist says:

    My answer is your house….You house take into account the raw materials and the labor to build. Also, it takes into account the rise income levels necessary to buy it.

  26. Willy2 says:

    It’s – IMO – a comparison between oranges and apples.

    Gold does well in an environment with (rising) negative REAL interest rates. But my indicator seems to suggest that REAL rates are becoming positive again.

    Housing is like any other speculative asset. The sheeple now think that “rental properties” are the “place to be”. But when housing gets bid up (AGAIN) then the end of an (speculative) investment cycle is (very) close.
    Real Estate = Inflation hedge ? I personally would say that investors are simply “chasing yield” (again). It’s a combination of liquidity combined with herd mentality.

  27. theexpertisin says:

    Goes to show that all that glitters are not solely stocks and bonds.

  28. rp says:

    It looks like Americans all bought houses, then all bought gold. Did they store all the gold in the houses?

  29. ElSid says:

    I can’t wait until the Fed starts buying loans used to buy gold. Note that’s the one asset that they are not in the business of supporting at the moment.

  30. odnalro zeraus says:

    It is said that the Shah of Iran flew out of the country with so much gold that his plane had a hard time to take flight, but he could not take any of his palaces with him.
    In general physical assets are a good inflation hedge; whether aging wine or tobacco; or inventories in the warehouse, but gold is hard to beat not only to hedge, but as a medium of exchange, store of value, transportability; etc.
    A liability in paper like a note payable is also a good hedge, if the interest is not higher than the inflation rate.
    Often if your working capital and net worth is zero you are hedged, unless your liabilities bear an interest rate higher than inflation and/or the profit on the sale of your physical assets.
    However, arbitrage between countries of different assets may vary.
    Pharmaceutical and many consumer goods inventories in countries with price controls are not a good hedge, as in Argentina or Spain.
    Capital assets and real estate in very poor underdeveloped countries may not be a good hedge, as in Haiti as it may be hard to realize.
    In general, in an upswing bullish economy real estate tends to do better, but in a declining bearish economy gold is king.
    And you can always build a HOUSE with GOLD BRICKS!!!

  31. Bob K. says:

    I bought my home in California in 1994 for 240,000. In 2013 it can sell for $600,000 gross. Over those 19 years I have paid nearly $190,000 in Insurance, taxes and maintenance on the home. When I dispose of the property I will pay an additional $24,000. My net gain is $186,000.

    I bought $240,000 in gold in 1994 at 384.15 an ounce and put it in my safe. I sold it today for
    $900,000 at $1441 an ounce. I paid 1% for commission at $9,000 and 25% in taxes at $235,000. My net gain is $476,000.

    Please help me understand what is wrong with my logic?

    • 1. You lived in that house didn’t you?

      What was the equivalent rent you would have had to pay for the decades you lived there? A $600k California house rents for what– $2500, $3500 a month? Figure out what that would have cost you to love elsewhere X 240 months –

  32. Livermore Shimervore says:

    ^ That’s the big problem with this comparison. One investment has some utility but equity-destroying ownership costs. A better comparison might have been a rental property (that is not your primary residence) vs. gold. That way its an apples to apples investment only comparison. And even better comparison would have been rental property vs. gold vs. S&P 500. The fact that the comparision was framed as home vs. gold almost makes me wonder if some RE or mortgage broker lobby was behind it in hopes of influencing a not very sophisticated investor in the market for mortgage.

    Either way most would agree that when you add up mortgage interest, crushing taxes, insurance (real insurance), maintenance and selling fees/taxes, financing a home is a bottom of the list investment as far as return. And that’s without addressing the fact that those extra costs are going to either require you buy a smaller home than you could afford to rent or you’ll have to leverage yourself deeper into debt to get that extra space and amenities, most likely at the cost of your long-term retirement savings.
    However in some states where cost of ownership expenses are low and mortgage interest can be had at these historically low rates, it can be a very good investment, particularly an income property currently in foreclosure that can be had for a huge discount. But the negative flipside is that for a property to be low cost it means it has to be in a modest income region thereby limiting it to only the income revenue and not really appreciation of the home since wages like the national average are unlikely to rise in the future any significant way. So homes in these areas do start kicking up in price beyond the historically average, another bank-fueled bubble is probably the cause and not something driven on solid fundamentals.

  33. GrenfellHunt says:

    This discussion might improve with a reference to Washer and Dunham’s 2012 paper, “Inflation Risk and Asset Class Performance”. http://www.scienpress.com/Upload/JFIA/Vol%201_3_4.pdf

    1) W&D look at returns from 1972-2011: the point is that eliminating the gold standard in 1971 fundamentally changed the significance of gold.
    2) From 1972-2011 quarterly returns were: bonds 1.93%, stocks 2.78%, gold 2.75%, REIT 2.78% (inflation 1.08%).
    3) These relationships changed depending on the level of inflation during the quarter. When inflation was 0% or less (11 quarters), gold=4.78%, REIT=4.96%. When inflation was 0-1% (73 quarters), gold=0.99%, REIT=3.53%. When inflation was 1-2% (48 quarters), gold=1.22%, REIT=1.13%. When inflation was over 2% (24 quarters), gold=3.18, REIT=-4.22 (the negative sign is not a typo).

    REITs are not the equivalent of a home, but the evidence may contribute to a more precise analysis of the problem.
    DISCLOSURE: no assets in either gold or REITs.

    • That is outstanding — thank you for the source, synopsis and details !

      • GrenfellHunt says:

        Thanks for the kind words, BR. I’m just a very small private investor trying to study this stuff. You run an outstanding blog, and I keep a very highlighted version of your “Bailout Nation” on my Kindle. Have a great weekend!

      • I think the reason why the REITs got crushed during periods of high inflation might be because those tend also to be periods of rising interest rates, and REITS tend to be highly leveraged (think: lots of short term mortgages…) and thus very sensitive to higher refinancing costs during times of rising rates.

  34. Livermore Shimervore says:

    well rental properties and primary residence properties may well be on polar opposite sides of the ROI spectrum. Probably a bigger chasm than any other investment class. With these low rates and all the supply that the housing bubble threw onto the market, this may be the best time since WWII to own a rental property (depending where of course).
    Meanwhile, for primary residences, the fiscal situation in many states is putting great pressure on residents who live in affluent districts/counties to cover a disporportionately large burden of the state’s property tax revenue. But I don’ have to tell you that BR.
    To me owning a primary residence vs. owning a rental poperty (again depending where) is like investing your 401K in money-losing fixed and variable management fees vs. an index fund. You almost have to own a rental property to off-set the screwing your getting by taxes and insurance.