Reader Question: Home Prices in Gold?

A reader emailed me with a question about home prices compared to gold:

Any easy way for you to compare Case-Shiller home prices to gold? I have a hunch prices have dropped much more dramatically than we realize, as our USD goes in the tank.

Maybe Goldman’s 22% drop prediction was closer if the nasty inflation wasn’t considered?

Since Case-Shiller is an index and doesn’t give us home prices in actual dollars, we can’t really compare Case-Shiller “home prices” to gold, but we can compare the median price. I went back to my spreadsheet of historic King County median prices and added a column for the price of an ounce of gold, and this was the result:

King County House Price in Gold

Indeed, if all of your assets were in gold instead of US dollars, home prices fell a whopping 45% between June 2010 and February 2012—double Goldman Sachs’ predicted drop.

Pricing homes in gold also dramatically shifts the home price peak. Seattle home prices peaked at just barely shy of 1,000 ounces of gold in Q2 2001, and fell to a low of 188.2 ounces of gold in Q1 2012—an 81% drop.

For comparison, here’s a chart with homes priced in gold alongside inflation-adjusted home prices:

King County House Price in Gold

Inflation-adjusted home prices (in USD) peaked in the third quarter of 2007 and fell 38% from the peak to the bottom (so far) in the first quarter of this year.

  

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

53 comments:

  1. 1
    softwarengineer says:

    Interesting Analogy Tim

    I’d add a caveat, when gold, home prices, stocks, etc peak out in price in the pryrammid scheme of life, its a poor time to switch from dollars to gold…..now, if we’d all sold our homes and rented in the early 2000s [or even later for that matter] and put all our old home equity in gold when it was under $300/oz we’d be rich as hades :-)

    http://www.usagold.com/reference/prices/2000.html

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  2. 2

    And wouldn’t it be fun to go into the escrow office and say ” I don’t have a cashier’s check, I didn’t wire money, but I brought a pound of gold to pay for the house.”

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  3. 3
    Blurtman says:

    This has been discussed previoulsy, in dialogue with professional poster pfffttt, who now that the election is over, is likely back to driving that cab full time.

    It probably should be no more illegal to sell gold plated tungsten bars as the real thing, than to print dollars as the Fed is doing. Both are counterfeitng.

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  4. 4

    I’m not really sure what pricing against a single commodity shows. Housing has probably done really well against natural gas. But in Seattle we should compare housing to the price of coffee. Either way, what’s the point?

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  5. 5
    Dave0 says:

    I agree with Kary, looking at home prices in gold is pretty pointless. I’m pretty sure that huge drop your chart shows starting in 2001 has more to do with the run-up in gold prices (gold bubble?) than the collapse of the housing bubble.

    Anyone think we should we look at home prices in barrels of oil? Canadian Dollars? Apple futures? They all seem as equally pointless as gold to me.

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  6. 6
    ARDELL says:

    RE: Ira Sacharoff @ 2

    I had an agent come in to the office one night with a suitcase full of cash his client gave him to pay for a house. He was sweating profusely and freaking out because it was too late in the day to bring it to a bank. It was a long time ago, but still funny.

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  7. 7
    David Losh says:

    My very first sale was with a guy who had his down payment in silver coins. He had them in the closet of his bedroom.

    He was disappointed that we wouldn’t let him use the coins, and that he had to sell them. Fortunately for him the coins were worth more than he thought.

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  8. 8
    HappyRenter says:

    Gold price is largely driven by speculation. It makes more sense to plot home prices in inflation adjusted dollars, or maybe one can use a currency basket. It all comes down to the question “How do you measure the value of a home?” and for that we have Case-Shiller. But in any case, the question about “Goldman’s 22% drop prediction” cannot be answered by evaluating home prices in gold, since the gold price is overinflated. I think that Goldman simply overestimated the price drop.

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  9. 9
    Doug says:

    RE: Blurtman @ 3

    So you think we should have a finite amount of currency in circulation? The increasing population squabbling over the same few dollars? Massive deflation, no one spending any money, every loan and debt (including the U.S. debt) exploding in value…

    Sounds great, Blurtman.

    As I’ve argued at SB before, gold is a terrible inflation gauge, driven by a speculative craze.

    Is every currency in the world worthless? Because gold also exploded in value measured against them. Are steel, aluminum and copper worthless? Because gold exploded in value against them (and hence, the USD still buys you a decent amount of these commodities) Is beef worthless? Is wheat? Shouldn’t they all be tracking with gold if gold is in any way a good indicator of inflation?

    Not even silver tracks with the fear-driven growth of gold.

    This is not difficult to look up. ( http://www.indexmundi.com/commodities/ )

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  10. 10
  11. 11
    Peter says:

    I bought silver in 2003 and used some for a down payment in 2011. A good trade.

    Silver was up 700% and the house was 50% off 2006 prices.

    Anyone who says that was not a good trade should refrain from giving financial advice.

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  12. 12
    pfft says:

    By Blurtman @ 3:

    This has been discussed previoulsy, in dialogue with professional poster pfffttt, who now that the election is over, is likely back to driving that cab full time.

    It probably should be no more illegal to sell gold plated tungsten bars as the real thing, than to print dollars as the Fed is doing. Both are counterfeitng.

    U Mad Bro?

    Call me when you get paid in gold.

    U Still Mad Bro?

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  13. 13
    Blurtman says:

    RE: Doug @ 9 – You’ll have to see Kary or Pfftt for lessons on how to engage in the strawman argument. If dollar issuance was in synch with the expanding population, as you seem to argue for, there would be no dollar devaluation. The monetization of debt, much of it fradulent MBS, is the recent cause of dollar printing. This is being done to bail out criminals, who through blatant fraud, have been paid in yesterday’s more valuable dollars, the obligations of which, passed onto others, are to be paid in less valuable future dollars. Quite a crime, worthy of Lex Luthor.

    It can be argued that gold is money. Not so for commodities.

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  14. 14
    pfft says:

    By Peter @ 11:

    I bought silver in 2003 and used some for a down payment in 2011. A good trade.

    Silver was up 700% and the house was 50% off 2006 prices.

    Anyone who says that was not a good trade should refrain from giving financial advice.

    I bought some silver in 2004, still have it. nothing cooler than a shiny mirror finish mint silver dollar. The Australian silver coins are awesome.

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  15. 15
    pfft says:

    By Blurtman @ 13:

    RE: Doug @ 9 – You’ll have to see Kary or Pfftt for lessons on how to engage in the strawman argument. If dollar issuance was in synch with the expanding population, as you seem to argue for, there would be no dollar devaluation. The monetization of debt, much of it fradulent MBS, is the recent cause of dollar printing. This is being done to bail out criminals, who through blatant fraud, have been paid in yesterday’s more valuable dollars, the obligations of which, passed onto others, are to be paid in less valuable future dollars. Quite a crime, worthy of Lex Luthor.

    It can be argued that gold is money. Not so for commodities.

    our current system is much better than the one that preceded it. past generations experienced gold as money first hand and rejected it for good reason. yet you disregard them, why? what special knowledge do you have?

    “This is being done to bail out criminals”

    no, it goes to bailout all of us.

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  16. 16
    pfft says:

    The euro has many of the same features as did the gold standard. how is that working out?

    it’s a disaster.

    Rate this comment: Thumb up 0

  17. 17
    Blurtman says:

    RE: pfft @ 15 – I am not at all surpised that you would laud the decision of a president who broke the law, spied on political opponents, insulted world leaders behind their backs, and went on weird anti-Semitic and racial rants.

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  18. 18
    Doug says:

    “It can be argued that gold is money. Not so for commodities.”

    That’s it? That’s your argument for gold outpacing everything else on the planet being because of a devalued dollar, rather than speculation? That’s pretty weak, to put it generously.

    Either everything else on the planet is being devalued, every currency and commodity, or gold is in a speculative bubble. Put it this way: my devalued dollar still buys me about the same amount of stuff as it did four years ago, except gold. I am ok with that state of affairs.

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  19. 19
    whatsmyname says:

    Nope, no bubble here. Wait, is that a double top?
    http://goldprice.org/charts/history/gold_10_year_o_usd.png

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  20. 20
    whatsmyname says:

    By Blurtman @ 13:

    This is being done to bail out criminals, who through blatant fraud, have been paid in yesterday’s more valuable dollars, the obligations of which, passed onto others, are to be paid in less valuable future dollars. Quite a crime, worthy of Lex Luthor..

    Are you talking about the gang of homesellers? They are the ones who effectively cashed out long term money – although we know they generally went right back in.

    The bankers were basically intermediaries. The whole game was to get in and out (with other people’s money on both ends), make a scrape on the differential in perceived risk for the split tranches, collect loan fees, and servicing contracts. To the degree that they are holding MBS securities and a big chunk of the debt directly, they are the ones getting paid back in lesser dollars. Who exactly are you mad at?

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  21. 21
    Tim says:

    By Ira Sacharoff @ 2:

    And wouldn’t it be fun to go into the escrow office and say ” I don’t have a cashier’s check, I didn’t wire money, but I brought a pound of gold to pay for the house.”

    HA! Sure would beat getting Money Orders from 7-Eleven for a $500 EM on a house. The things we see, lol.

    S-Crow

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  22. 22
    pfft says:

    By Blurtman @ 17:

    RE: pfft @ 15 – I am not at all surpised that you would laud the decision of a president who broke the law, spied on political opponents, insulted world leaders behind their backs, and went on weird anti-Semitic and racial rants.

    by all means do anything but reply in an intelligent way on the subject at hand!

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  23. 23
    redmondjp says:

    RE: whatsmyname @ 20 – Um, your opinion of bankers is much to high. Check out these links – especially the first one, pp 6-7 on how the bankers were recorded talking about how they were screwing over their client (Gibson Greeting cards, in that example):

    http://www.iitk.ac.in/infocell/announce/convention/papers/Colloquium-03-Swati%20Khatkale%20final.pdf

    Also, check out this one, especially the list of notable former employees at the bottom – I’m sure you’ll recognize some of them and pay special attention to where they are now:

    http://en.wikipedia.org/wiki/Bankers_Trust

    Blurtman is right. The biggest crooks are running our financial system and neither party dares to touch them. I am reminded of that every time I go to my local Washingt uh, oh I’m sorry, Chase branch.

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  24. 24
    Mindy the cat says:

    What does “our USD goes in the tank” even mean?

    U.S. inflation as measured by the cpi is currently about 2 percent, an historically low figure: http://www.bls.gov/cpi/cpid1209.pdf

    This is par for the course for the money loons: nothing but overheated rhetoric and metaphors.

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  25. 25

    By Doug @ 9:

    As I’ve argued at SB before, gold is a terrible inflation gauge, driven by a speculative craze.

    It’s not just speculation. It’s also fear. A lot of people buy gold not hoping that it goes up, but instead hoping it retains value better than other things if economies collapse.

    Buy yes, horrible inflation gauge.

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  26. 26
    wreckingbull says:

    RE: Mindy the cat @ 24 – I’d use the CPI as an inflation indicator at your own peril, just as I would be careful using U3 as a measure of unemployment. You may find that by time you see a trend in the CPI, it is too late and you missed the chance to adjust your asset allocation.

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  27. 27
    Blurtman says:

    RE: whatsmyname @ 20 – Perhaps I should be more specific. Kill the investment bankers.

    But there were quite a few mortgage banks and savings banks that committed fraud. Countrywide, anyone? WAMU, WAMU? Obama buddy Deval Patrick’s Ameriquest?

    For sure, there were little people that fabricated their incomes. But before we jail them, can’t we go after the more educated folks who knew better and whose crimes brought down the US economy?

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  28. 28
    Peter says:

    There is a lot of talk about gold being in a speculative bubble. As many of you have probably lived thru them, let me just point out two good examples of bubbles, the stock market in 2000, and the housing market in 2007. Both speculative tops were marked by high levels of public participation. All bubbles are. That is certainly not the case with precious metals which probaly have a 1-2% participation rate. When everyone here gives in, buys gold, and starts talking about their latest silver stock buy on a housing blog, that will be a sign of a bubble top.

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  29. 29
    ChrisM says:

    RE: Mindy the cat @ 24 – If 2% inflation is acceptable to you, how much is $10,000 worth after 20 years? Bonus points for determining total amount factoring in compound interest at current bank savings rates.

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  30. 30
    ChrisM says:

    RE: Doug @ 18 – “Put it this way: my devalued dollar still buys me about the same amount of stuff as it did four years ago, except gold. I am ok with that state of affairs. ”

    A shocking comment.

    Do you buy the food in your household? Are you old enough to remember when coffee and ice cream were sold by the pound? Food packaging has gotten significantly smaller.

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  31. 31
    ChrisM says:

    Also, since this is Seattle, remember what the Canadian dollar used to be worth? When I was a kid I’d get as much quarters as I could when in Canada, then spend them back in Washington as US quarters.

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  32. 32
    wreckingbull says:

    RE: Peter @ 28 – Rampant fraud is also a hallmark of speculative bubbles. Dot-com bubble [check], housing bubble [check], gold bubble:

    http://www.cbsnews.com/8301-505268_162-57492610/major-u.s-gold-buyer-shuts-down-in-wake-of-fraud/

    The best protection against getting caught up in one is to have read the bible:

    http://www.amazon.com/Manias-Panics-Crashes-Financial-Investment/dp/0471389455

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  33. 33
    Mindy the cat says:

    Wrecking, the cpi *is* the standard and broadest measure. Loons have been claiming for several years now that inflation is about to take off. It hasn’t. And it’s unlikely to, given unemployment levels and a still-hawkish Fed.

    ChrisM, 2% annual inflation is low by historical standards, and yes, it’s more than acceptable. It’s actually useful, because wages and some prices tend to be fixed in nominal terms, a low rate of inflation gets you better price flexibility than zero inflation, which is what you seem to, unrealistically, want.

    As far as preserving wealth, your “$10,000 after ten years” question only makes sense if you are saving dollar bills in a mattress, which maybe is what you are doing. If you have $10,000 now and you want the most buying power from that ten years hence, subject to your appetite for risk, that’s just a standard investment-advice question.

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  34. 34
    Peter says:

    RE: wreckingbull @ 32 – I consider myself quite educated on economic cycles. Enough to have seen what was coming to the housing market and sell my own house in 2005. I admit a little early, but better early than late. I bought again in 2011 and I think I got quite a deal. I’m not extreme on either side. Housing is not always a bad investment, it’s not always a good one.

    For those claiming to be experts in the precious metals bull or bear market, I only ask this; How much money did you make in the last 10 years investing in them?

    Gold and Silver are up 6-800% in ten years and some people have been saying “bubble” the whole time…. the ones who didn’t buy any.

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  35. 35
    HappyRenter says:

    By Peter @ 34:

    Gold and Silver are up 6-800% in ten years …

    Subtract from that 30% since they are considered collectibles and any fees associated with owning/storing precious metals.

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  36. 36
    Rumpole says:

    RE: whatsmyname @ 19

    If the Seattle Bubble has taught us anything, it’s that nothing goes up forever. At some point, the gold bubble will burst, and they’ll be money to be made in shorting it.

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  37. 37
    wreckingbull says:

    RE: Mindy the cat @ 33 – I’d argue it is a lagging indicator, as it measures price, not growth of money and credit supply. I don’t find it very interesting. If that makes me a loon, so be it.

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  38. 38
    wreckingbull says:

    RE: Peter @ 34 – I’m not sure who is claiming to be an expert. What I will say is that predicting the top of a bubble is a crapshoot. I also sold my home in 2006, and purchased again in 2010. I get the same feeling today about gold that I did about housing in 2006. Will gold continue to surge upward? Quite possibly.

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  39. 39
    whatsmyname says:

    RE: redmondjp @ 23 – First off, good reading materials that you provided. I would agree that banking has plenty of bad players, (as does virtually every industry of any size).

    Second, though, I was not opining on the quality of bankers, but rather outlining the mechanics of the mortgage part of the banking business which I continue to find difficult to reconcile with Blurtman’s complaint of trading old valuable dollars for new weak dollars.

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  40. 40
    whatsmyname says:

    RE: Blurtman @ 27 – This is why we needed and continue to need Glass-Steagal.

    The seeds for this explosion were sown in the tech boom. Banks found they could make more money in marketable securities than in loans. Plus they could carry lower reserves. Plus they could manage the assets with fewer employees. What could have more appeal to corporate “job creators”?

    Plus who can resist the idea of carving up your $100 loan portfolio to sell for $104?

    BTW, I thought your post about going to war with Iran, and paying for it with tax cuts was the Bubble’s best comment of the political season.

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  41. 41
    whatsmyname says:

    RE: wreckingbull @ 38 – Serious question: You sold your house in 2006, and bought again in 2010. When you factor in the transaction expenses, moving expenses, time, effort, interruptions and hassle, was it a good deal, an OK deal, or a not that great a deal?

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  42. 42
    Bob says:

    Gold crashing will be a good thing. It will mean the inflationary cycle is over, the US Dollar has been protected and preserved, and the Federal Reserve has quit saturating the market with credit.

    Unfortunately for asset holders, the deflationary cycle will make your asset prices appear much lower than they are now.

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  43. 43
    Bob says:

    Pencil me in for a home purchase in January 2017. ;)

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  44. 44
    ARDELL says:

    RE: whatsmyname @ 41

    I would add when did you buy it?

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  45. 45

    By whatsmyname @ 41:

    RE: wreckingbull @ 38 – Serious question: You sold your house in 2006, and bought again in 2010. When you factor in the transaction expenses, moving expenses, time, effort, interruptions and hassle, was it a good deal, an OK deal, or a not that great a deal?

    I suspect he didn’t buy the same house he sold! ;-)

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  46. 46
    Lo Ball Jones says:

    RE: softwarengineer @ 1

    Or bought AAPL.

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  47. 47
    Doug says:

    RE: ChrisM @ 30

    A) Yes, I buy the food in my household
    B) I specifically said in the last four years, so remembering the good old days when butchers sold flank steak as scrap doesn’t really apply to my argument.

    I never said inflation didn’t exist; that would be asinine. I just said that it was at reasonable levels. My Dad bought his first home for $20,000. He also got paid $4 an hour or so to be an engineer.

    The Canadian dollar has been strong vs the US dollar for a number of years now, longer than gold has been rocketing up. In fact, I’d wait for their own housing bubble to burst before we start worring about our currency vs the canadian dollar.

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  48. 48
    Doug says:

    RE: Peter @ 34

    This is always the argument of those in a bubble, though.

    “Well if we’re in a bubble, how come my house is worth so much, huh?”

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  49. 49
    ChrisM says:

    RE: Doug @ 47 – Maybe you’re not paying attention in the grocery store then.

    https://www.nytimes.com/2011/03/29/business/29shrink.html?sq=clifford%20food%20inflation&st=cse&scp=1&pagewanted=all&_r=0

    “Bags of Doritos, Tostitos and Fritos now hold 20 percent fewer chips than in 2009, though a spokesman said those extra chips were just a “limited time” offer.”

    http://business.time.com/2011/03/29/all-new-packaging-less-food-same-price-what-a-deal/

    “Consumers are being told that packages of Saltines with 15% fewer crackers and subbing 13 oz. cans of vegetables for the old 16 oz. units—while charging the same price as their older, larger equivalents—are amazing new advances shoppers should get excited about. “

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  50. 50
    Doug says:

    RE: ChrisM @ 49

    That’s completely in line with around 3-4% inflation. I’d rather they just charged more rather than downsize, but what are you gonna do?

    Not to mention we had a huge corn drought, so it’s natural that Doritos, Tostitos and Fritos (all CORN chips) be more expensive by the oz. That’s not emblematic of massive systematic inflation.

    Now, we can argue whether 4% inflation is too high (I would posit that while we’re still in a good deal of net debt, it might actually be a good thing) but 4% inflation doesn’t lead to 400% gains in gold. It can certainly be argued that gold was undervalued for quite some time, as it was flat throughout the 90’s.

    However even with that argument, you can say that gold should have corrected to around $700-$800 an ounce. For gold prices to make sense, everything would need to cost about quadruple what it did in the 90’s, and it DOESN’T.

    Kary is right. Fear of inflation is seriously outpacing inflation. We’ve got a decent portion of the populace listening to Glenn Beck, believing we’re going to be living in Mad Max/rapture endtimes imminently.

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  51. 51
    macDog says:

    A big reason I’m able to buy now is because I bought gold,silver and mining stocks last decade while all my friends and their pets begged me to buy a house or two. I saved that extra couple thousand per month from paying cheap rent and invested. Then I started selling some positions a couple years ago to diversify and moved into bonds. Now it’s cheaper to buy than to rent in the city so I’m taking advantage. My landlord has been raising my rent so it’s time.
    I don’t think I’ll have the luck this decade. I stopped trading this year since it made me so dizzy. Frankly I think the dollar is in a bubble, everything else follows along with speculation. I’m taking a break and want to hibernate in my new home, maybe I’ll dream of normalcy.

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  52. 52
    ChrisM says:

    For all those reading this board who help determine national policy, my modest idea:

    Switch to metric. Now. It will completely confuse the consumer, who will no longer be able to do historical comparisons for a huge swath of food/fuel purchases.

    All future American STEM students will thank you.

    Thus endeth the lesson.

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  53. 53

    RE: ChrisM @ 52 – Just go decimal.

    I remember when I used to shop at Fred Meyer’s deli, the people behind the counter couldn’t understand what you wanted if you said: “Three tenths of a pound of ham.” They could convert 1/4 pound to .25, but they had no idea that 3/10ths was .30.

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