Housing market - inflation paradox

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aarondenal's picture
aarondenal
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Posts: 59
Housing market - inflation paradox

Hello all,

What in the world is going to occur with respect to housing prices if indeed the inflation that seems imminent occurs?  It seems like a real opposing force.  Can anyone cite historical examples of falling housing/property prices and rising inflation?  I could give my thoughts but I would rather have yours.

 

Paul Legge's picture
Paul Legge
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Re: Housing market - inflation paradox

I have heard several people that are somewhat excited about the idea of severe or hyperinflation because they project that hyperinflation will effectively wipe out the debt on their home because if inflation starts to go vertical on the exponential curve then house prices eventually probably will too; hence they are bullish on real estate as they are with other tangible assets like gold, silver, oil, etc.

I have a couple of thoughts on this.  While of course this seems possible and perhaps will come to pass, it seems a bit assumptive to assume such positive prospects on real estate due to inflation.  it seems entirely possible, and more probable to me, that as inflation comes home to roost, then we will experience a severe partial inflation in assets that are not typically bought with debt.  Things normally purchased with credit, will continue to suffer far, far behind inflation and perhaps keep continuing in a deflationary price decrease mode.  if necessities become more expensive, (i.e. food, heat, water, transportation and medical), then items that are not completely necessary became negotiable or even luxury...and it would seem to me that many, many single family houses are not exactly needed to keep warm.  You can move in with friends, other family, co-live with other families.  We treat houses like we treat cars.  We live in luxury and we expect that everyone must have one.  Just as we can start to carpool a whole lot more than we do now if we were forced too, so people can abandon their homes if they really had to and could move in with others.  This creates a relatively large potential supple increase if "partial inflation" gets bad.  As food gets more expensive, and more and more of peoples disposable income gets channeled to necessities , then house prices will continue to decrease or lag behind inflation.

What makes this concept even more vivid, is that the chances of peoples wages keeping up with inflation seem poor.  Since many wages are locked in union contracts for years, its possible to imagine a situation where people refuse to work certain jobs because it simply isn't paying for the gas and the food bill, and the unions will be unable to keep up with the vertical curve of inflation at some point.  Im sure the CPI and PPI will be grossly understated and so even non-union employers will be behind inflation.  This will continue to persist until a critical mass hits and employers find a way to pay people enough for food in exchange for their work, otherwise people will leave their jobs.

If partial inflation come to pass, the idea of purchasing something on credit through dollars will cease to exist.  People will trade for other things that have value.  Housing will become a completely dead asset class that is utterly forgotten about.  It wont even exist in the memory of the public to go and buy houses as a smart way to hedge inflation.  People will work for food, just like Zimbawens panned for gold just to eat. 

This, ironically, might be the sweet time to buy good houses with good locations for a "long term" investment with a commodities saving base.  It seems eventually, the a new structure or new currency base would eventually come to pass due to civil unrest.  Eventually things get restructured, look at Germany and Argentina.

Holding debt in housing, seems to be a risky play for inflation to me.  Do you really trust these banks and this modern government to let the debt go.  They will roll over the debt and revalue it from prebubble years, they will mark you somehow.  It seems so much smarter to invest in other things to hedge against inflation.  Buying long term food now seems cheaper today while it is still readily avail.  Gold and silver seem fairly abundant, i.e. it still is avail at coins shops.  Might not always be.

My conclusion, since housing is probably one of the last things to go up in value along with inflation, partial inflation with necessities will dominate severely over houses and by the time inflation gets so bad that housing actually starts to increase, people wont even care.  They will be consumed by other priorities of food.  If heat gets really expensive, then you might see people destructing houses in order to make them smaller for better heating costs.  Peoples wages will not keep up with inflation.  They will lag severely behind or not even respond to inflation.  This will put a 2 X mulitple on this entire concept.

There are my thoughts for now.

 

Paul

Items not backed by credit are more typically "needed" items

Paul Legge's picture
Paul Legge
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Re: Housing market - inflation paradox

one more thing, add in peak oil to this whole equation, and now you have a 4X or 10X multiplier effect.  Now I made myself scared.

Paul

Carl Veritas's picture
Carl Veritas
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Re: Housing market - inflation paradox

No charts, sorry.   But I wonder where the housing market and the economy would be now if Bernanke allowed housing prices to clear.  Of course that would mean pigs on both sides of the trade that gorged on easy credit would have to be slaughtered first    :)

aarondenal's picture
aarondenal
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Posts: 59
Re: Housing market - inflation paradox

I guess I have another spin on  the question:

Can inflation override the deflationary pull of the housing market?  And vice versa?  Will the housing market work to stall out the forces of inflation?  It just seems to me to be a log jam.

earthwise's picture
earthwise
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Re: Housing market - inflation paradox
aarondenal wrote:

I guess I have another spin on  the question:

Can inflation override the deflationary pull of the housing market?  And vice versa?  Will the housing market work to stall out the forces of inflation?  It just seems to me to be a log jam.

There is another dynamic at work in the housing sector. It's most clearly seen in a chart from Case-Schiller that has been published (sorry, I couldn't relocate it myself- a little help anyone?) that shows housing prices going back 100 years. The chart indicates that the bubble of 2005 has not completely deflated and brought prices back to the historical norm. I indicates that another 25% decline is in order. Add in ARM resets due over the next two years and housing looks even more dismal. Another downward pressure on housing is that historically, the average house was affordable by the average wage. With our manufacturing base having been offshored over the last few decades, never to return, wages are falling in real terms therefore further depressing the housing prices. 

These factors along with the deflationary pull you've cited will provide a heavy counterweight to any inflationary forces at work.

We are in the midst of a paradigm shift. Historically, housing has not been considered an investment or a source of wealth creation until the last generation or two. This was made possible by the benefit of the exhorbitant privilege the US has enjoyed. Those times are ending.

R.US's picture
R.US
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Re: Housing market - inflation paradox

Inflation or deflation it does not matter after the collapse.

In some post-soviet countries the price of a flat was only twice higher than the cost of utilities and taxes for the year. Attention, it is not flat so cheap but utilities are so much expensive.

Perhaps such wonder awaits U.S.homeowners

dshields's picture
dshields
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Posts: 599
Re: Housing market - inflation paradox

If housing prices follow the pattern of history, then housing prices will go down more - maybe 20 percent more.

 

sevenmmm's picture
sevenmmm
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Joined: Jan 19 2011
Posts: 108
Re: Housing market - inflation paradox
Paul Legge wrote:

I have heard several people that are somewhat excited about the idea of severe or hyperinflation because they project that hyperinflation will effectively wipe out the debt on their home because if inflation starts to go vertical on the exponential curve then house prices eventually probably will too; hence they are bullish on real estate as they are with other tangible assets like gold, silver, oil, etc.

I have a couple of thoughts on this.  While of course this seems possible and perhaps will come to pass, it seems a bit assumptive to assume such positive prospects on real estate due to inflation.  it seems entirely possible, and more probable to me, that as inflation comes home to roost, then we will experience a severe partial inflation in assets that are not typically bought with debt.  Things normally purchased with credit, will continue to suffer far, far behind inflation and perhaps keep continuing in a deflationary price decrease mode.  if necessities become more expensive, (i.e. food, heat, water, transportation and medical), then items that are not completely necessary became negotiable or even luxury...and it would seem to me that many, many single family houses are not exactly needed to keep warm.  You can move in with friends, other family, co-live with other families.  We treat houses like we treat cars.  We live in luxury and we expect that everyone must have one.  Just as we can start to carpool a whole lot more than we do now if we were forced too, so people can abandon their homes if they really had to and could move in with others.  This creates a relatively large potential supple increase if "partial inflation" gets bad.  As food gets more expensive, and more and more of peoples disposable income gets channeled to necessities , then house prices will continue to decrease or lag behind inflation.

What makes this concept even more vivid, is that the chances of peoples wages keeping up with inflation seem poor.  Since many wages are locked in union contracts for years, its possible to imagine a situation where people refuse to work certain jobs because it simply isn't paying for the gas and the food bill, and the unions will be unable to keep up with the vertical curve of inflation at some point.  Im sure the CPI and PPI will be grossly understated and so even non-union employers will be behind inflation.  This will continue to persist until a critical mass hits and employers find a way to pay people enough for food in exchange for their work, otherwise people will leave their jobs.

If partial inflation come to pass, the idea of purchasing something on credit through dollars will cease to exist.  People will trade for other things that have value.  Housing will become a completely dead asset class that is utterly forgotten about.  It wont even exist in the memory of the public to go and buy houses as a smart way to hedge inflation.  People will work for food, just like Zimbawens panned for gold just to eat. 

This, ironically, might be the sweet time to buy good houses with good locations for a "long term" investment with a commodities saving base.  It seems eventually, the a new structure or new currency base would eventually come to pass due to civil unrest.  Eventually things get restructured, look at Germany and Argentina.

Holding debt in housing, seems to be a risky play for inflation to me.  Do you really trust these banks and this modern government to let the debt go.  They will roll over the debt and revalue it from prebubble years, they will mark you somehow.  It seems so much smarter to invest in other things to hedge against inflation.  Buying long term food now seems cheaper today while it is still readily avail.  Gold and silver seem fairly abundant, i.e. it still is avail at coins shops.  Might not always be.

My conclusion, since housing is probably one of the last things to go up in value along with inflation, partial inflation with necessities will dominate severely over houses and by the time inflation gets so bad that housing actually starts to increase, people wont even care.  They will be consumed by other priorities of food.  If heat gets really expensive, then you might see people destructing houses in order to make them smaller for better heating costs.  Peoples wages will not keep up with inflation.  They will lag severely behind or not even respond to inflation.  This will put a 2 X mulitple on this entire concept.

There are my thoughts for now.

 

Paul

Items not backed by credit are more typically "needed" items

 

Good ideas. Add in what the house is made out of, how much it costs in energy, & how comfortable multiple families can coexist, and the house would be a winner. For instance, a glued-together McMansion far from a working center will probably be abandoned, whereas, a well insulated and properly outfitted with renewable energy four-plex, within walking distance of work and commerce, will increase in value.

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