Effect of inflation on future housing prices

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ddierck_IHB

New member
Hi everyone,



This is my first post. I have been lurking these forums and reading the real estate blogs for a while now. I will be in the position to buy a house with 20% down or more in the next couple of years or so. There has, however, been a question in the back of my head for a while, and I haven't seen it answered yet.



It seems that most experts predict significant inflation in our future due to the large amounts of cash that our government is producing to help with bailouts, fund stimulus packages, etc. While conventional wisdom indicates that housing prices should continue to drop over the next year or two, I do wonder if inflation is being taken into account with these projections. While I do want to get in as close to the market as possible, I would also like to be safe in the case that rampant inflation takes place as well.



Should the threat of future inflation change influence the timing of my impending home purchase, or is it the sort of thing that significant inflation will not need to be worried about for the next couple of years or so?



Any insight?



D
 
Housing prices are going to come down regardless for the next few years. The plan is to buy when prices are at fundamental values. We probably won't see full effects of the stimulus plans until all the housing crisis is resolved; my simple argument for that is, we simply don't know how big the problems is, so government is just going to print more and more money at the problem. Now, when we buy, RE or leveraging is always a good hedge against inflation. We can lock a 30 year fix; and just let inflation eat away at our debt; sounds too simple?
 
[quote author="roundcorners" date=1227939019]Housing prices are going to come down regardless for the next few years. The plan is to buy when prices are at fundamental values. We probably won't see full effects of the stimulus plans until all the housing crisis is resolved; my simple argument for that is, we simply don't know how big the problems is, so government is just going to print more and more money at the problem. Now, when we buy, RE or leveraging is always a good hedge against inflation. We can lock a 30 year fix; and just let inflation eat away at our debt; sounds too simple?</blockquote>
True, during times of inflation you want to deleverage and have as few assets as possible because having leverage will work against you. Now when inflation comes back, you want to leverage up with fixed rate debt so if inflation really takes off the present value of your total debt payments decreases.
 
plus, the only thing that affects housing prices is *wage* inflation. in fact, inflation of household expenses works against price increases for housing (since people will need to buy food/gas/etc regardless, they will have less leftover for housing).



so only if you see wages shoot up will housing prices shoot up.



not likely in my humble opinion.
 
I think you will see price inflation for necessities and lots of it.

I think you will not see much or any wage inflation.

And I think you will see interest rate inflation and oodles of it.



None of these are really inflation at all, but are actually price increases, (currency devaluation), but I digress.

I think the effect of the combination of these three increases will be to add to the present decrease in housing prices or at least keep them from rising much. People will be spending so much more of there limited income on food and energy, that they will have less to spend on purchasing a home. And I think that it will be very difficult for those who are waiting to purchase a home because interest rates will make affordability a continuing obstacle.

And although the Chinese may still be running a trade surplus in the future, my guess is that the Chinese will be much less willing to store that surplus in the form of US treasuries and more in the form of commodities and infrastructure investment, thus adding to pricing and interest rate pressures in the US.

If you do a search of "predictions", I think you will find many more opinions on this subject. I seem to remember a thread containing opinions of this sort.
 
I'm in Phoenix this holiday weekend. I think AZDavid has been being overtly nice to people. The price declines in Phoenix are absolutely stunning.



Literally the price declines from last Christmas to this Thankgiving left me dumbstruck when I picked up the Phoenix area copy of Homes & Land. Entire pages of foreclosures. Four bedrooms, 3 baths, pool, one story SFR 2500+ sf with big yard, $150K... Page after page of big, 4+ bedroom SFRs in the low $100K range.
 
[quote author="freedomCM" date=1227939936]plus, the only thing that affects housing prices is *wage* inflation. </blockquote>


I seriously question this assumption. I appreciate the logic behind it, and it may well be largely true, but I wonder if the average american consumer isn't the demand-based driver of prices which we assume they are. This applies not just to housing, of course, but also commodities and other kinds of assets which might soak up devaluation. With the 30-yr down around 3.5%, an incredible level of deflationary pressure is baked into the cake, but the contrarian in me doesn't buy it, and suspects that treasuries (and the dollar) may well be showing signs of being the last and biggest of a series of bubbles which began with the blowback from LTCM a decade ago.



Crazy financing on housing and intense speculation on commodities were blamed for this last wave up, but I wonder if the future holds a few surprises in terms of our assumptions about the Greenback.
 
Horm, I see it like this... Absent some kind of artificial stimulus (like toxic loans), monthly house payments are made from earned income. Those with other methods of covering the monthly nut are few and far between. If nominal wage growth is flat, nominal house prices are going to be flat. Over the long run, the local median house price is going to oscillate across a trendline that's some multiple of the local median wage. Dollar index, gold, milk, or the price of tea in China has little impact. IMHO.
 
[quote author="freedomCM" date=1227939936]plus, the only thing that affects housing prices is *wage* inflation. in fact, inflation of household expenses works against price increases for housing (since people will need to buy food/gas/etc regardless, they will have less leftover for housing).



so only if you see wages shoot up will housing prices shoot up.



not likely in my humble opinion.</blockquote>


100% correct on wage increases.



The price a good (in this case a house) can sell for determines the costs of materials and labor - not the other way around. This seems counter intuitive at first (to me anyways) but I believe it as truth now. The free market has a way of finding equilibrium amongst costs/wages and prices etc. We seem to fight this tooth and nail - and it is very costly both tax-wise and productivity-wise.



Inflation will hurt house prices short term. As wage increases occur (they must as equilibrium is sought), RE prices will keep pace with inflation - long term, maybe very long term. Fixed! Rate! Debt! is your friend in times of inflation.



Is anyone out there still ringing the deflation bell?
 
[quote author="matt138" date=1240841970][quote author="freedomCM" date=1227939936]plus, the only thing that affects housing prices is *wage* inflation. in fact, inflation of household expenses works against price increases for housing (since people will need to buy food/gas/etc regardless, they will have less leftover for housing).



so only if you see wages shoot up will housing prices shoot up.



not likely in my humble opinion.</blockquote>


100% correct on wage increases.



The price a good (in this case a house) can sell for determines the costs of materials and labor - not the other way around. This seems counter intuitive at first (to me anyways) but I believe it as truth now. The free market has a way of finding equilibrium amongst costs/wages and prices etc. We seem to fight this tooth and nail - and it is very costly both tax-wise and productivity-wise.



Inflation will hurt house prices short term. As wage increases occur (they must as equilibrium is sought), RE prices will keep pace with inflation - long term, maybe very long term. Fixed! Rate! Debt! is your friend in times of inflation.



Is anyone out there still ringing the deflation bell?</blockquote>
*RAISING HAND* Governments around the world have the printing presses going overtime but the whole de-leverage situation we are going throw is destroying wealth faster than the presses can pump out money....hence deflationary forces (although companies are getting smart and pulling capacity/supply to try to stablize prices).
 
[quote author="matt138" date=1240841970]Is anyone out there still ringing the deflation bell?</blockquote>


Go check out <a href="http://globaleconomicanalysis.blogspot.com/">Mish's Blog</a>. He is still ringing the deflation bell loud and clear.
 
The late 70's, early 80's inflation tonic was high interest rates. That rate policy drove home prices straight downward. Our 2010 on rate direction will be higher simply because our vast debt cannot be refinanced at yields high enough to attract capital. European rates will go higher and so will ours in a never ending circle. Imagine what an 18 percent prime rate would do to the US standard of living....



Very generally speaking.... during the 1980's defense spending was a factor in bringing us out of that recession. The 1990's free fall recession was choked off by the temporary internet bubble. The subsequent bust and rebirth in the early 2000's was fueled by free trade and MEW. A difficult question to answer is what will bring us out of this recession. I think we're in for an L shaped recession for many a year, which will include much higher interest rates than this generation has ever seen.



My .02



SGIP
 
[quote author="Soylent Green Is People" date=1240873434]The late 70's, early 80's inflation tonic was high interest rates. That rate policy drove home prices straight downward. Our 2010 on rate direction will be higher simply because our vast debt cannot be refinanced at yields high enough to attract capital. European rates will go higher and so will ours in a never ending circle. Imagine what an 18 percent prime rate would do to the US standard of living....



Very generally speaking.... during the 1980's defense spending was a factor in bringing us out of that recession. The 1990's free fall recession was choked off by the temporary internet bubble. The subsequent bust and rebirth in the early 2000's was fueled by free trade and MEW. A difficult question to answer is what will bring us out of this recession. I think we're in for an L shaped recession for many a year, which will include much higher interest rates than this generation has ever seen.



My .02



SGIP</blockquote>


The government basically sets interest rates. They will not raise them until we come out of the recession. I mean, look at rates now-they are the lowest they have been in modern history. Interest rates and inflation will both remain extremely low until the economy recovers.
 
The Government tries to set interest rates but market forces will overwhelm its ability to keep an artificial low in place. The 10 year T has risen, despite Fed/Treasury intervention. The fabled sub 4.0% 30 year fixed rate isn't here even with significant MBS purchases by the Treasury. Yields fall when there is an impression of stability. Today the US Government is trading short term appearances of stability for long term instability that is coming. There are whispers every so often of the US Government losing it's AAA rating. Just last week Moody's said the UK could possibly lose it's AAA rating because of it's current financial shambles. If confidence is ever lost in the UST's ability to repay debt, no amount of Government intervention can push rates down. As a former employer said to me years ago "You can't boil the ocean" which is what current stimulus actions by all Federal entities are trying to do.
 
[quote author="Geotpf" date=1240889001][quote author="Soylent Green Is People" date=1240873434]The late 70's, early 80's inflation tonic was high interest rates. That rate policy drove home prices straight downward. Our 2010 on rate direction will be higher simply because our vast debt cannot be refinanced at yields high enough to attract capital. European rates will go higher and so will ours in a never ending circle. Imagine what an 18 percent prime rate would do to the US standard of living....



Very generally speaking.... during the 1980's defense spending was a factor in bringing us out of that recession. The 1990's free fall recession was choked off by the temporary internet bubble. The subsequent bust and rebirth in the early 2000's was fueled by free trade and MEW. A difficult question to answer is what will bring us out of this recession. I think we're in for an L shaped recession for many a year, which will include much higher interest rates than this generation has ever seen.



My .02



SGIP</blockquote>


The government basically sets interest rates. They will not raise them until we come out of the recession. I mean, look at rates now-they are the lowest they have been in modern history. Interest rates and inflation will both remain extremely low until the economy recovers.</blockquote>


The government does NOT set interest rates. The Federal Reserve, which is not a government entity, REACTS to interest rates and other measures, and TRIES to influence interest rates, but does not set interest rates, basically or otherwise.
 
[quote author="no_vaseline" date=1240895749]What happens to RE values when interest rates start bumping 10% (in the bag) or 15% (maybe) or 18% (I'm in Awgee territory now)?</blockquote>


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[quote author="no_vaseline" date=1240895749]What happens to RE values when interest rates start bumping 10% (in the bag) or 15% (maybe) or 18% (I'm in Awgee territory now)?</blockquote>
Home prices begin to get crushed and people like Awgee and I can buy our homes for CASH.
 
If mortgage rates rise to 10%,15% or 18%, wouldn't the money market rates at dollarsavingsdirect.com also rise to 8%, 13%, or 15%? So how many of you think that this hyper-inflation will surpass that of 1979-1980? I don't think it is possible to avoid inflation/hyper-inflation at this time. It is all matter of when. The Great Depression in 1929 lasted for 34 months. If the start of the recession was in October, 2007 we are currently 18 months into this recession. I am hoping that the pain and collapse of our stock market is strong but short (not dragged out like the Japanese.) and I really really hope that the dust will settle at the end of 12 months or Jesus is coming soon.
 
Who said anything about inflation? I'm with Mish - this is an oversupply problem, totally deflationary. Have you seen my milk thread?



I also think interest rates are going to the moon.



Interest rates =/= inflation.
 
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