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ANALYSIS OF PRICES OF HOMES, COMMODITIES, AND STOCK MARKETS IN THE ONITED STATES USING THE COMMODITY INDEXATION DISCIPLINE

Homes in America,[1]

[2]

As shown in Exhibit 6.4, the average U.S. home prices in terms of the U.S. dollar kept rising and have either stabilized, as they did in the early 1980s; declined slightly, as in the early 1990s; or declined significantly, as happened starting in 2006 to 2009.

Looking at this chart in 2005, one can quickly reach the erroneous conclusion that home prices in America must keep on rising. However, in terms of gold[3] (how many ounces of gold are needed to buy an average-priced home), Exhibit 6.5 shows the true fluctuation in house prices.

The chart shows that prices are relatively more stable when expressed in terms of gold. The chart shows the average house price fluctuating between 200 and 400 ounces of gold. Whenever the price penetrates the lower level of the envelope, it signals that homes are underpriced; this can be considered a good indicator for investing in homes. If the price penetrates the upper boundary of the envelope, it has signaled over the years that homes are entering a price bubble, and we should be careful in our investments as well as in our financing decisions for homes. The chart also shows that houses in the United States began getting pricy around the late 1990s and peaked in 2003 to 2004. It also shows that house prices started to decline after the end of 2005 to reach a bottom, or close to a bottom, in 2008-2009, signaling a good market. It is also important to note that it takes about 7 to 10 years for home prices to start climbing and for a home's owners to reap a good profit on the sale. In general, 2009 home prices in terms of gold indicate that it is a good time to start buying homes and financing the housing industry. Of course, this data is based on general nationwide data. It is recommended that specific data in specific markets should be used in order to reach the correct decisions.

The same correlation can be depicted by looking at the price of a home if we were to pay for it in terms of rice or wheat[4] (if the only product of a community were rice or wheat). We will find that the same correlation applies. The reader must be warned that these charts (as shown, for example, in Exhibits 6.12 and 6.13) are presented here as a directional tool; they are meant to be used by decision makers to gauge the direction of price trends in order to avoid participating in a bubble that may result in significant loss of their investments. It is also important to state that it is hoped that a full research effort be conducted along these lines to refine the analysis, which is admittedly presented here in the form of the art of RF (Islamic) finance. One of the questions that need to be answered is: why did the prices decline drastically, especially the price of agricultural commodities, from their pre- 1971 levels when the Bretton Woods dollar-gold parity of $35 dollars per ounce of gold parity was discontinued?

  • [1] National Association of Home Builders (NAHB), nahb.org/page.aspx/category/sectionID=131.
  • [2] The United States Department of Commerce, U.S. Census Bureau, www .census.gov/.
  • [3] London Bullion Market Association (LBMA), lbma.org.uk/stats/goldfixg.
  • [4] United States Department of Agriculture (USDA), National Agricultural Statistics Service (NASS), nass.usda.gov/QuickStats/Create_Fed- eral_All.jsp.
 
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