How to Protect Your Home Savings From Inflation?

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Priced_Out_IT_Guy_IHB

Priced_Out_IT_Guy_IHB

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I just dumped $40,000 of my home savings into a 9-month ING direct CD at 4.55%, however, from what I've seen shopping around lately it seems like prices in Irvine for everything from gasoline to produce are going up more by the matter of 10-15% in the last year rather than the standard ~3%.





This has me a bit worried. Here I am saving for my 20% down while I getting the ominous feeling that my purchasing power is depreciating...



 
I have been saying this over and over. With the devaluation of the dollar and the cost of good and products will cost more. So too will the cost of purchasing a home. And it's not because the price of homes are going up. It's the weakening of the dollar and its purchasing power. Which mean that instead of 400k to buy a condo. An individual will need 420k to buy the same condo.
 
<p>I have been pondering. With the recent devaluation of the dollar and its weakened purchasing power. Wouldn't the cost of building materials and labor cost go up? If so, this means that it will cost more to build a home. Therefore, this higher cost will then be passed onto the buyers?</p>
 
<p>I had heard that they were going down. But my builder buddy in South Florida says that at best the prices are holding steady.</p>

<p>According to NPR, Iraq of all places is getting lots of foreign investment lately to invest in cement plants--lots of reconstruction needed of course. This says 2 things to me: first, maybe, just maybe, things in Iraq are actually getting good enough that some investments can be safely made. And second, this will take demand away from cement plants elsewhere.</p>

<p>By the way Awgee the minor amt of gold I bought was not to make money, just for survivalist purposes. But now we have made something like 16% in a few months.</p>

<p>Somewhere on the media, I heard that in order for gold it hit its previous high, it would have to go to more than $2200 of our inflated dollars.</p>

<p>Since I think there is going to be a deflation, the hub was asking, did I mean gold was going to go down too. I said no, I think gold, since it is traditional money, will continue to go up for quite a while. </p>

<p>Anyway, I'd be buying a bit of gold as a hedge, if thinking of buying a house.</p>

<p> </p>
 
reason - Price inflation is unpredictable as to where it may show up. My guess is that it is very unlikely that price inflation will show up in construction wage inflation. That particular wage sector is being influenced by a greater supply and a lesser demand. It is also not a given that just because your groceries and gas cost more, that you will be more willing to spend more on a home. Interestingly, the opposite may hold true, especially if wages do not keep up with inflation, which is not only possible, but in my view, likely. It is not a given that if a society experiences price inflation, that society will have more money to pay for increased prices.
 
LawyerLiz, take stats about gold being underpriced based on the high in the early 80's and inflation since then with a grain of salt. If you look at the price of gold during that point in time, you will find that in the last 4 days of the run up in gold prices that started in the 70's, the price went up something like 24%. If you adjust for inflation for a commodity based on the peak price that was held only for a short time on a moon shot, you are going to get an inflated number.
 
Reason, in a deflationary period, cash is kind.





In an inflationary period, things are kings.





The reason behind this is simple. If an imbalance between money in the economy and demand for goods and services in that economy are such that there isn't enough cash (deflation), the cash you have has more buying power. If the imbalance is such that there is too much cash (inflation), then you have less buying power.





While it is true that physical assets will generally increase in price during inflationary periods because of a devalued currency, it is neither absolute, nor uniform across the board. For example, even though the "fine" work of Alan Greenspan has led to the revival of inflation in our economy, the price of consumer electronics like HDTVs are remarkably lower than it was one or two years ago. This has nothing to do with deflation (or inflation), it is because of maturing technologies leading to increased supplies of a good and the corresponding drop in the price of that good.





Similarly, the price of a house or condo in Orange county has dropped since the market peak in 2006. Again, this is not deflation, but simply the laws of supply and demand.





While it is true that generally speaking, the prices of physical assets will increase during inflationary periods, that rule of thumb does not apply to the prices of physical assets that were wildly overpriced to begin with.
 
<p>But is it not plausible that HDTVs are remarkably lower due to the fact that foreign manufacturers being competitive have outsourced to countries with lower labor cost? Hence, they're able to lower the prices? For example, instead of assembling the TVs in Japan. The products are sent to Mexico or India. </p>

<p>I suppose I wasn't clear regarding house prices. Assuming prices have reach the bottom. Going forward with building of new homes. Considering the prices of gasoline as one example. For construction companies to process and transport said materials. It will cost more. Then wouldn't that translate to higher prices of the newly built home. </p>

<p>True, devaluation of the dollar is not the "sole" reason for home prices to rise. But would it be fair to say. The weak dollar will have a small influence in home prices?</p>
 
Though I have never worked for a consumer electronics company, I have worked in defense manufacturing environments and feel comfortable assuming that price drops in HDTVs are a result of improved yield on high cost components such as the LCD or plasma screen. In any highly engineered product, labor pales in comparison to the cost of not having to throw away defective product.





The problem with your assumption about housing prices is that it is disconnected from reality. There is a fundamental relationship between the price of a house in a given area, and what people earn in that area. The last several years have seen us as a country ignoring that relationship, but it will return. Price is based on supply and demand. And with the freeze in the credit market and a product that is not affordable, prices will drop.





The dollar would have to collapse to make current prices affordable. That collapse would have to be large enough that wages would increase to bring the ratio between housing prices and wages in sync again. Given that the average income in Irvine is about $85k, and the average house price is somewhere around $600k, wages would have to double for current housing prices to make sense.





Or housing prices would have to be cut in half.





Or the two could meet somewhere in the middle.





Given the softening of the economy, I'm not counting on a double in wages any time soon.
 
<p>IT_Guy - I have been thinking about the same things a lot lately. I grew up in a very savings oriented family and have saved up quite a bit now and it really irks me to think that my savings will be worth less than they are today just because its in the form of the USD. </p>

<p>From talking to a bunch of people and reading up on everything, I think my strategy for my down payment account will be a mix of metals, foreign currencies and traditional bank CDs. I would love to hear more on what others are doing.</p>

<p>By the way, 4.55% sucks. Wachovia is giving me more in my money market and has a physical building a few blocks from me. I recommend boookmarking this site: <a href="http://bankdeals.blogspot.com/">http://bankdeals.blogspot.com/</a> - specifically go to "weekly summary and rates" link on the right hand side for a quick summary.</p>
 
<p>But with home prices falling recently, wouldn't that make up the differences with the devaluation of the US dollar? In other word, if an individual has 100k in a saving acct. And the last few months we have seen home prices dropped by 100k - 200k. Would it really matters if our savings are losing purchasing power?</p>

<p>Or has the dollar depreciate that rapidly that some are concern with their savings chipping away?</p>
 
<p>In the short run, there is a vast oversupply of empty houses, together with a vast undersupply of people who can afford the prices, even if the prices have dropped a lot recently.</p>

<p>Just because somebody spent a whole bunch to produce something--either a house, or anything else, doesn't mean they are going to make a profit or even break even, when they try to sell it.</p>

<p>So house prices will continue to drop. </p>

<p>During the inflation era of the late 70s, early 80s, people did get big percentage raises. Given all the awful stuff happening now, I don't see that happening.</p>

<p>In the longer run, after prices drop, if well may be that after the inventory is used up, then we have a problem. This will be at least 2 years from now and manybe 3 years. Now the prices to contruct houses will be way up because the materials costs will be way up.</p>

<p>Who knows about labor? A lot of the labor might have gone in to other things, or back to Mexico.</p>

<p>So now, the builders, a lot of whom are now bankrupt, will be very careful to build only if they think they have a good chance of making a profit. So either prices will go up, or the builders will build very small houses, with formica and other cheap finishing products.</p>

<p>Or, the Irvine Company will have to reduce the price of land, which y'all seem to think they will not do.</p>

<p>The very small and cheap is what happened in Miami in '85.</p>

<p>Or, we will be in a depression, people will be doubling up with each other, and many will be on the streets.</p>

<p> </p>
 
I have said this before and I'll say it again. I just don't get the McMansion argument in Irvine. As in, the reason prices are so high is because the builders all built behemoth houses upgraded to the hilt. It just ain't so here in Irvine and much of OC. Even if prices were sound based on fundamentals, this single mom (a one-income household) would rather rent forever than buy 80% of the crap being built around here. I don't want to buy a 1200 square foot apartment, thank you very much. I want a house!





So if the builders decide that the thing to do is build even smaller, more densely-compacted units in the Great Park, and Orchard Hills, and Stonegate, then they're smacking this highly-qualified potential buyer in the face with an attitude of, "we don't want your money."
 
Regarding Iraq, conflict zone investments doesn't always mean the country is or will be more stable. It's just that there are massive profits to be made in certain sectors at conflict zones.





Same with post-natural disaster reconstruction, the demand/supply factor drives up prices. But I think it's unethical to profit in such situations.
 
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