Housing Prices & Inflation

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Kman's picture
Kman
Status: Bronze Member (Offline)
Joined: Jan 19 2009
Posts: 72
Housing Prices & Inflation

 

Housing prices have been doing a good job of crashing the past year or so.  By all accounts, its resonable to assume that this will continue for some time.  It may even get worse for move up homes as Option Arms begin to damage that segment much as subprime hit entry level housing.  In addition, at some point interest rates will have to go up to respond to inflation, so that will further lower housing prices.

 On the other hand, inflation will devalue the dollar.  So, at some point, housing prices (not values) will have to go up.  I believe that this housing price inflation will lag critical items like food and energy, but the Trillion $ question is- when will inflationary forces win out and reverse the current trend in housing prices???

To put it in perspective:   I plan to sell my CA house to lock in my equity (I still have some!)  I plan to put that cash into a conservative place (CD, FDIC insured savings, and maybe some Gold/ Silver) while renting.  My goal is to then buy back in 1-2 years when I expect to be able to buy back a similar house for much less using this same cash and not even need a mortgage to do it.  Thus, sell today to buy back tomorrow a free and clear home.  Even better will be to buy a fixer and put in some sweat equity to make $ go even further.

 Would appreciate any and all comments with respect to my logic. 

Kman

Septimus's picture
Septimus
Status: Silver Member (Offline)
Joined: Aug 19 2008
Posts: 200
Re: Housing Prices & Inflation

Hi Kman,

I think the scenario you outlines has a decent chance of occurring. I have thought about a similar idea myself. Torn between your option and just hoping precious metals go up a lot via inflation so that I can pay the house off relatively cheaply by using currently owned PMs.

 

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gtazman
Status: Martenson Brigade Member (Offline)
Joined: Oct 6 2008
Posts: 48
Re: Housing Prices & Inflation
Kman wrote:

 

Housing prices have been doing a good job of crashing the past year or so.  By all accounts, its resonable to assume that this will continue for some time.  It may even get worse for move up homes as Option Arms begin to damage that segment much as subprime hit entry level housing.  In addition, at some point interest rates will have to go up to respond to inflation, so that will further lower housing prices.

 On the other hand, inflation will devalue the dollar.  So, at some point, housing prices (not values) will have to go up.  I believe that this housing price inflation will lag critical items like food and energy, but the Trillion $ question is- when will inflationary forces win out and reverse the current trend in housing prices???

To put it in perspective:   I plan to sell my CA house to lock in my equity (I still have some!)  I plan to put that cash into a conservative place (CD, FDIC insured savings, and maybe some Gold/ Silver) while renting.  My goal is to then buy back in 1-2 years when I expect to be able to buy back a similar house for much less using this same cash and not even need a mortgage to do it.  Thus, sell today to buy back tomorrow a free and clear home.  Even better will be to buy a fixer and put in some sweat equity to make $ go even further.

 Would appreciate any and all comments with respect to my logic. 

Kman

According to Charles Hugh Smith, who has written on the Real Estate crisis for many years, at www.oftwominds.com the bottom of the price decline may not be for 3-5 years.  Your desire to sell now would be a good idea, but buying in 1-2 years might set you up for what Charles Hugh Smith says "Phase 2: buyers briefly emerge as "this must be bottom;" auctions as foreclosures hit peak".  See his blog post at http://www.oftwominds.com/blogjan09/endgame-RE01-09.html.  I'm not fully convinced we have seen anywhere near bottom prices.  Where you are at it might seem like hell, but hold on, it will get worse.  If you can hold off until 2013-2014 the better according to Smith.

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rci2145
Status: Member (Offline)
Joined: Jan 3 2009
Posts: 24
Re: Housing Prices & Inflation

K-man, I am in a similar situation in Houston.  I have some equity left in my home and have decided to put it up for sale.  Home prices haven't dropped much, if it all here but I expect it to happen shortly. 

I agree with your analysis that eventually, home prices will go up with the devaluation of the dollar but they will not go up nearly as much as consumer items.  Also, it may take a long time for any inflation to take hold.  The largest unwinding of debt in history is going to crash the prices of all things bought with credit worldwide.  I am thinking I'd like to sell now while there might be some enthusiasm with the stimulus and Obama's mortgage resructure plan.  I think these things will simply delay the inevitable second wave of foreclosures.  Anyway, I would put my money into all types of commodities, especially precious metals and buy a house again in 2-4 years.  Easier said than done though.  Good luck.

Kman's picture
Kman
Status: Bronze Member (Offline)
Joined: Jan 19 2009
Posts: 72
Re: Housing Prices & Inflation

Thanks all,

What are your thoughts on what it will take for housing prices to go up again?

Credit unwinding = minimal lending=  lower house prices

High inflation = high interest rates = lower house prices

So what will trigger house prices to go up- will it be that prices will have to get so low that even if high inflation very high interest rates kick in homes are still perceived as affordable?

bluenose's picture
bluenose
Status: Member (Offline)
Joined: Mar 30 2009
Posts: 4
Re: Housing Prices & Inflation

 

Hi All,

This is my first post after having my eyes opened by the "Crash course"...

I live in Australia, which is in a much better economic position than the US, but feel that we will be hit by whatever contagion hits the USA (as will everyone else).

Anyway, on this topic... please forgive me, but I'm failing to connect the dots.

As K-man says (and I agree):

"Credit unwinding = minimal lending=  lower house prices

High inflation = high interest rates = lower house price"

BUT ... I thought high inflation will make EVERYTHING more expensive?

Why will house prices be any different?

I was up till 2am last night thinking about this apparent contradiction ... would love someone to shed some light!!

Cheers, Pete 

SagerXX's picture
SagerXX
Status: Diamond Member (Offline)
Joined: Feb 11 2009
Posts: 2237
Re: Housing Prices & Inflation

I *think* high interest rates = lower housing prices is due to the fact that if you're paying a big premium to borrow the money to buy the house, you buy less house because the cost of servicing the debt prevents you carrying a bigger monthly nut on the mortgage.

Multiply that across an entire market and it makes for downward pressure on the price of all houses. 

But I'm no expert so I'd be interested to see what other folks think.

 

VIVA -- Sager

Doug's picture
Doug
Status: Diamond Member (Offline)
Joined: Oct 1 2008
Posts: 3159
Re: Housing Prices & Inflation

Kman

Quote:

What are your thoughts on what it will take for housing prices to go up again?

Expectation inflation.Money mouth  People again believing houses go up forever.

Doug

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