Real Estate is the Best Anti-Inflation Play

[Jordan]

In numerous threads I've encountered a view that real estate is a loser when rates invariably rise from inflation. I want to challenge this position, hopefully keeping within the confines of what makes a good debate according to Steven Douglas.

The bear case is this:

1. Shadow inventory will knock down real estate prices
2. Rising rates will ultimately drive down the amount people are willing to pay for a home

I submit that these are nonfactors in real estate investing. First, shadow inventory is not evenly distributed across the United States so much of it is in markets where no investor would put his or her dollars. Secondly, rising rates from inflation will not drive down the price of a home.

Real estate vs. Gold

Real estate, much like gold, is safe in that you cannot make more of it. Should interest rates rise due to an increase in the level of inflation, then the cost to build a new home would also increase. Thus, the intrinsic value of a piece of cash flowing real estate with a locked-in interest rate for 30 years should also rise.

Homes sell for less than their cost of replacement in many markets, meaning they sell for less than their intrinsic value. If inflation goes up, so do interest rates. If you stop here, you would think that people would pay less for a home because they cannot afford a $200,000 home at 10% if they barely qualify for a $200,000 home at 3%.

However, if we're led to believe that rising rates are from inflation, then wouldn't it also be true that the cost to build a home would also increase? Of course. Which means that real estate is a good anti-inflation play that actually generates cash flow - unlike gold - and like gold, you cannot make more real estate out of thin air.

So tell me, the superinvestors of RPF, why is real estate a poor anti-inflation play? Hasn't real estate historically been one of the best anti-inflation plays? And if so, why is it not a good play today?

 

[oyarde]

I have land ,timber , tillable, silver , copper, gold, water , food , weapons, ammo .I have all the bases covered.I imagine SD does too.

 

[oyarde]

On the other hand, rental properties kind of suck. Been there , done that ....

 

[tod evans]

Damn, and here I was getting all excited about liquidating all the stuff I can hold in my hand and making some big money.....

Guess maybe I ought to keep on keepin' on...

 

[CaptUSA]

The only problem with real estate is that the bubble never really deflated. Having interest rates so low for so long allowed people to borrow more which drove up the cost. A lot of real estate is over-valued right now.

It's still a solid asset, though. And you can still find good buys.

Bottom line, if you have real estate already, keep it. If you still owe, refinance while rates are low. If you're looking to buy, you can get good deals (especially at low rates), but you may have to hold it for a long time before you can get your money back. When the value of the dollar shrinks and interest rates start to rise, it will be harder for people to get the money to buy your land.

So to me, it's not an inflation issue, it's the bubble issue.

 

[Jordan]

The only problem with real estate is that the bubble never really deflated. Having interest rates so low for so long allowed people to borrow more which drove up the cost. A lot of real estate is over-valued right now.

It's still a solid asset, though. And you can still find good buys.

Bottom line, if you have real estate already, keep it. If you still owe, refinance while rates are low. If you're looking to buy, you can get good deals (especially at low rates), but you may have to hold it for a long time before you can get your money back. When the value of the dollar shrinks and interest rates start to rise, it will be harder for people to get the money to buy your land.

So to me, it's not an inflation issue, it's the bubble issue.

First, CaptUSA, thanks for bringing forth something worthy of discussion.

Of course, all real estate is local. I want to focus on the bubble issue, because I think the bubble is long gone. Here's the thing: I can look in my newspaper right now and find 20-50 high-quality houses that are selling for less than their cost of replacement by 20% or more. That is, if I wanted to duplicate a $100,000 home on the market, I would have to spend $120,000+ to do so.

No one can make any money building new homes in my market. It costs more to build a home than to buy one that already exists. It's fundamentally irrational to build a home where I live at the present time. Homebuilders don't make money building homes for $120,000 and selling them for $100,000.

So, with that said, I fail to see how the market is in bubble territory still. If a home is selling for less than what it would cost to make a new one, then it is hardly overvalued. Seeing as prices to construct a new home go up over time, then real estate makes a good investment.

 

[TheTexan]

When the value of the dollar shrinks and interest rates start to rise, it will be harder for people to get the money to buy your land.

It would also drive up the price of rent. Duplex/triplex/quad ftw.

 

[Tpoints]

First, CaptUSA, thanks for bringing forth something worthy of discussion.

Of course, all real estate is local. I want to focus on the bubble issue, because I think the bubble is long gone.

By bubble gone, you mean the height is gone, but not that it's bursted already, right? Because if you don't believe hyperinflation is coming, you MUST believe houses will depreciate, right?

 

[LibForestPaul]

Real estate is horrible to lease, since it can not be owned, it should not be bought for anything other than utilitarian needs (some place to live). The only difference from renting is that you are locked into a particular location. The hell I want to lease a piece of land, pay taxes on it for perpetuity, pay taxes on faux capital gains (2013+), and not be able to hide it on black market. Gold boys, gold and silver. Income producing holdings, utilities, own home business, the grayer the better.

 

[cubical]

Home purchases are, for the most part, a purchase with credit. As the cost of credit rises, less people will be able to borrow, it is as simply as that.

Even with rates at historic lows the housing market is sitting on the lows of the last 10 years. Just because something costs less than to replace, doesn't mean it is undervalued. It means there is excess supply.

When we hit hyperinflation, houses may go up or down in price, it matters how bad it is, but they will almost certainly approach their "cash value" price.

 

[Dianne]

Home purchases are, for the most part, a purchase with credit. As the cost of credit rises, less people will be able to borrow, it is as simply as that.

Even with rates at historic lows the housing market is sitting on the lows of the last 10 years. Just because something costs less than to replace, doesn't mean it is undervalued. It means there is excess supply.

When we hit hyperinflation, houses may go up or down in price, it matters how bad it is, but they will almost certainly approach their "cash value" price.

And no one should ever buy a house with credit. We have learned that when your name goes on the dotted line, the bank that pretends to loan you money; never puts forth one dime of consideration (which is mandatory in a real estate transaction) .... then they sell your signature over and over and over and over again. In many cases the 100,000. they pretended to loan you, was sold on the stock market several times before you even signed the document.

Pretend you write a blank check to someone... sign it.. You have hundreds of people photocopying it, and rather than cashing it... they are selling it.

You can't do that with a blank check ... photocopies don't play... but promissory notes/mortgages do according to the courts. Everyone look at the promissory note you signed when you purchased your home... and see how intentional it is that your signature on the last page does not correspond with the first pages. Page 1 might be a half of page... page 2 might be a full page... All they want is your signature, to something... and they will take whatever they can attach it to ... anytime past, present and future.

 

[NoOneButPaul]

However, if we're led to believe that rising rates are from inflation, then wouldn't it also be true that the cost to build a home would also increase?

Isn't this the exact same thing the so called experts were saying right before the housing bubble burst?

Real Estate does have a long way to drop still because it was not allowed to bottom out in 2008.

I'd rather put my money into commodities like gold and silver and rent housing then to deal with owning a house through credit.

 

[cubical]

And no one should ever buy a house with credit. We have learned that when your name goes on the dotted line, the bank that pretends to loan you money; never puts forth one dime of consideration (which is mandatory in a real estate transaction) .... then they sell your signature over and over and over and over again. In many cases the 100,000. they pretended to loan you, was sold on the stock market several times before you even signed the document.

Pretend you write a blank check to someone... sign it.. You have hundreds of people photocopying it, and rather than cashing it... they are selling it.

You can't do that with a blank check ... photocopies don't play... but promissory notes/mortgages do according to the courts. Everyone look at the promissory note you signed when you purchased your home... and see how intentional it is that your signature on the last page does not correspond with the first pages. Page 1 might be a half of page... page 2 might be a full page... All they want is your signature, to something... and they will take whatever they can attach it to ... anytime past, present and future.

That's not the fault of credit, but of our financial system. Credit is fine and can play an important role in an economy.

 

[PaulConventionWV]

In numerous threads I've encountered a view that real estate is a loser when rates invariably rise from inflation. I want to challenge this position, hopefully keeping within the confines of what makes a good debate according to Steven Douglas.

The bear case is this:

1. Shadow inventory will knock down real estate prices
2. Rising rates will ultimately drive down the amount people are willing to pay for a home

I submit that these are nonfactors in real estate investing. First, shadow inventory is not evenly distributed across the United States so much of it is in markets where no investor would put his or her dollars. Secondly, rising rates from inflation will not drive down the price of a home.

Real estate vs. Gold

Real estate, much like gold, is safe in that you cannot make more of it. Should interest rates rise due to an increase in the level of inflation, then the cost to build a new home would also increase. Thus, the intrinsic value of a piece of cash flowing real estate with a locked-in interest rate for 30 years should also rise.

Homes sell for less than their cost of replacement in many markets, meaning they sell for less than their intrinsic value. If inflation goes up, so do interest rates. If you stop here, you would think that people would pay less for a home because they cannot afford a $200,000 home at 10% if they barely qualify for a $200,000 home at 3%.

However, if we're led to believe that rising rates are from inflation, then wouldn't it also be true that the cost to build a home would also increase? Of course. Which means that real estate is a good anti-inflation play that actually generates cash flow - unlike gold - and like gold, you cannot make more real estate out of thin air.

So tell me, the superinvestors of RPF, why is real estate a poor anti-inflation play? Hasn't real estate historically been one of the best anti-inflation plays? And if so, why is it not a good play today?

If you're going to buy real estate for keeps, then you want the prices to be low. If the prices are low, then you have a better opportunity to rent. If the prices go up, then you can flip it. It really depends on what you are willing to do and the skills you have. Just buying a house and waiting for the market to go up to resell is a failing strategy. You should plan to make your money back within 2 years at the most, whether that means collecting the price of the house in rent or reselling it for double your total investment. Double is a lot to ask for higher priced homes, but for people who are just starting out, a 15k house with 5k investment can turn into a 40k house at resell value if you can find it for that cheap. They could be foreclosures or even just a private sale from someone who just wants to get rid of it. That's how we got our latest house. There was no advertising involved, and you can get a pretty good deal if you talk face to face with people without relying on the marketing facade.

 

[PaulConventionWV]

On the other hand, rental properties kind of suck. Been there , done that ....

It can be a pain, but it's worth it if you have enough of it. Very little work for a good income.

 

[PaulConventionWV]

Real estate is horrible to lease, since it can not be owned, it should not be bought for anything other than utilitarian needs (some place to live). The only difference from renting is that you are locked into a particular location. The hell I want to lease a piece of land, pay taxes on it for perpetuity, pay taxes on faux capital gains (2013+), and not be able to hide it on black market. Gold boys, gold and silver. Income producing holdings, utilities, own home business, the grayer the better.

I don't see why taxes are such a big problem. Even if you do consider it renting from the government, do you really think they're going to step in and take it away arbitrarily? You make way more money from rent than you pay in taxes anyway. So why is that such a deferment if you pay $500/year in taxes on a small apartment building and make 20k/year in profit.

 

[Dr.3D]

I don't see why taxes are such a big problem. Even if you do consider it renting from the government, do you really think they're going to step in and take it away arbitrarily? You make way more money from rent than you pay in taxes anyway. So why is that such a deferment if you pay $500/year in taxes on a small apartment building and make 20k/year in profit.

I pay three times that tax for just my home.

 

[Carson]

Snip...

So tell me, the superinvestors of RPF, why is real estate a poor anti-inflation play? Hasn't real estate historically been one of the best anti-inflation plays? And if so, why is it not a good play today?

It sure has been one of the best. Out stripping most commodities I would figure.

Still I don't think the markets have finished collapsing. I think things will continue on a downward spiral until we regain control of the counterfeiting of our currency. That or we are allowed some currency competition.

I think there are many areas we are going to have to re-evaluate. I've heard of a couple in recent days. I've heard people say as long as the price of gold is this high the mining will continue. Same for oil. Big boom. ? The increases all seems strictly due to inflation. And proportional. I don't really see how twice as many of something worth half as much can really get you off of your butt to do something.

I've also noticed in many areas it seems impossible to get good quality. I bought some sewing needles today and never did find any that looked like something I would sew with. Two places later I found some that looked suitable to pull splinters. I also glommed onto some great old music books that they don't print any more. They have new editions but these had ring binding that lays flat on your music stand.

I suppose there are lots of quality items out there that have increased in value and could be a real hidden investment.

 

[opal]

While real estate is the topic. What do y'all think of *land trusts*?

I keep reading about people (mostly rich folks) putting their real estate assets in trusts - with themselves as the beneficiary. Theory here being that instead of the property being in a person's name, it's in a trust's name, hiding who actually owns the property.

I'm also seeing articles on scammers using the same tactics as actual land trusts to dupe people into signing their property over to a trust.

 

[PaulConventionWV]

I pay three times that tax for just my home.

It varies. We have an apartment building that is in the mid hundreds.