What happens to mortgages during high inflation?

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Mr. Fri's picture
Mr. Fri
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What happens to mortgages during high inflation?

Since the rules of our financial world are changing and I’m not too good at thinking through major changes in an economy, I have to ask the question to others who understand more than I about a currency collapse.  Let’s say I have a house in the US with a $200,000 mortgage.  If very high inflation hits the US, the dollar would lose a lot of value and gold would soar.  Let’s say the price of gold goes to $20,000/oz so I could sell ten gold coins and buy off the house.  If I originally bought these gold coins at $1,000/oz then I’ve essentially bought a house for $10,000.  (Note, I’m using an absurdly high number for gold just to have round numbers.)  

Now, what if a new currency is issued?  Let’s say $10,000 is now equal to 1 FRI ( I always wanted to have my face on the currency…).  Does that mean my mortgage gets converted to 20 FRIs?  Is that what happens, does everything get converted the new currency?  I guess that would mean I’d have a job that would pay about 5 FRIs per year, or 0.1 FRI a week.  I’m sure a lot of other major things would be going on at this time of turmoil but does a straight exchange of new money for old take place across the board? 

Somewhere there has to be a flaw in my thinking because getting a $200,000 house (in today’s dollars) for only $10,000 worth of gold doesn’t seem right. The banks are pretty smart and I doubt I’m going to be able to beat them at their own game.

 

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Re: What happens to mortgages during high inflation?

That's exactly what happens, unless some horrific riot inducing laws get passed.  This has already happened in the past.  If you bought a house in the 1960's, by the 1980's when your house was getting close to being paid off, your mortgage was les than your utility bills. Even with mild inflation of say 5%, as long as you have a job or income that is keeping up with inflation, your fixed-rate mortage will become less of a burden relative to your other expenses.

As CM has pointed out before, the problem is that if you don't have an income or assets like gold keeping up with the inflation, then you can become trapped with all your income paying for the necessities (food) so that you still can't pay the mortgage.  Also you have to be aware that things like taxes and insurance will be going up as well.  Stil, I think as long as you have sufficient assets to tide you over, even without a job, for awhile, you are certainly better off not paying off any fixed rate loans.  Of course, that is only if you are in the inflation camp. Smile There are other things you have to consider as well.  Housing is still probably significantly over valued, so you have to weigh several options: 1) Sell house now (if you still have positive equity), buy PM, and then buy a house later when real prices fall and PMs rise. 2) Hold house even though the value may fall because the loan you have now you may not be able to get again with tougher lending standards and wait for inflation to reduce the burden.

Does anyone know of historic charts showing the price of houses relative to necessities (like food).  I'm thinking if you look at long term trends with housing priced in necessities, you could determine what "value" represents normal house prices.   I've seen housing shown in inflation adjusted dollars and gold, but would lke to see it relative to something that is not as manipulated.

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Re: What happens to mortgages during high inflation?

The way Washington's been acting over time, if we had high inflation,  they'd probably just change the rules on you ex-post facto, breech your mortgage contract, and jack up your interest rate. 

Gotta save the "too big to fails" you know. 

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Re: What happens to mortgages during high inflation?

Hyperinflation is super for fixed debt. Awful for consumer staples, fuel, heating.

PMs will offer a strong conversion into the new currency. If you Google Mexico's Peso crisis you should be able to read about how old debt was scheduled using their new Peso.

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Re: What happens to mortgages during high inflation?

That's exactly what I have been wondering too.

I am gearing up for deflation but I figure I can put away a couple of 50 pound sacks of rice to take into my bank when the mortgage comes up for renewal, in case I am wrong.Tongue out

It seems to me that hyper-inflation would just reward those with too much debt (mortgage, car loans, HELOCs etc...) and hurt those who have saved and maintained manageable debt. Wouldn't deflation be the greater worry here?

Also, when the Fed "prints" money and it is used on a banks balance sheet to make up for the value lost on assets (mortgages) is it really putting more money into the system? That same system, at one time, had a much greater value put on real estate but it disappeared. Isn't the new money just replacing that "value"? I just don't get how that new money would create hyper inflation laying on a balance sheet. If housing prices came back, however.........Undecided

I know, just an economics ignoramous........

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Re: What happens to mortgages during high inflation?

This is a topic upon which I have written many words.

One thing I think we should all try and avoid as thinking about it as an "either/or" situation as in "will we have inflation or deflation?"  The answer, most likely, is "yes."

We will have inflation in some things, I am pretty sure in energy costs rising over time (and everything linked to them), even as some assets are deflating and others are inflating.

As astutely pointed out above, inflation only works to your favor if your income and/or assets are rising along side it, otherwise it's a killer.  Here's a handy way to look at it.

Inflation = 'good'

  • Income rising faster than inflation
  • You have large debts held at a fixed rate of interest that is below the rate of inflation

Inflation = 'bad'

  • Income rising slower than rate of inflation
  • You have large debts at a fixed rate above the rate of inflation

Inflation = 'disaster'

  • Your income shrinks or disappears
  • You have large debts at a floating rate of interest

Of course there are other combinations of these elements but I think the point has been made.  There are a wide variety of possible outcomes here.

For my money, I vastly prefer to not hold debt at this time because I am uncertain about my income stream, because I am uncertain about monetary and fiscal policy going forward, and because I do not trust the sanctity of contract law which my government has proven (again and again recently) means nothing if/when favored special interests ask for it to be suspended to "save the system" or whatever other hokey excuse is trotted out to justify a blatant theft. 

My confidence is very low in the system right now and trust is one of those things that takes a long, long time to rebuild.  This is one of the reasons I was so annoyed with the cavalier attitude of Paulson/Geithner/Bernenke et al. when they rode roughshod over the most primary and basic tenets of our legal and financial frameworks.  It's as if they had no appreciation for the importance of the appearance, if not the reality, of basic fairness and justice in our larger social contract.  Penny wise, pound foolish comes to mind.

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Re: What happens to mortgages during high inflation?
derfman64 wrote:

It seems to me that hyper-inflation would just reward those with too much debt (mortgage, car loans, HELOCs etc...) and hurt those who have saved and maintained manageable debt. Wouldn't deflation be the greater worry here?

Also, when the Fed "prints" money and it is used on a banks balance sheet to make up for the value lost on assets (mortgages) is it really putting more money into the system? That same system, at one time, had a much greater value put on real estate but it disappeared. Isn't the new money just replacing that "value"? I just don't get how that new money would create hyper inflation laying on a balance sheet. If housing prices came back, however.........Undecided

I know, just an economics ignoramous........

HELOCS aren't fixed. During Hyperinflation we may experience insane interest rates on any and all debt that doesn't have a fixed rate. Any debt that doesn't have a locked in interest rate will likely be a choke hold and become hard and or impossible to service.

As for where the money is sitting: I don't look at it that way. You may want to simplify it by: We take in 2.2 trillion we pay out 4.4 trillion (over 8 trillion if you use John Williams Shadow Statistics GAAP).

They can't borrow via bond sales to foreigners and investors. They "print" the difference. They have threatened to stop QE (Quantitative Easing - fancy name for monetizing debt / printing / counterfeiting). If they do that we default. OR they will steal your 401k and IRA and buy bonds to finance this insane deficit with your money, or there will be a crash in equities (stocks) and people fly to "perceived safety" of bonds. OR they will cut government and do away with your mother's social security and tell China and every other bond holder foreign and domestic to go scr*w.

There are only 3 ways out: 1.) Default and shaft everyone, 2.) Balance the budget (HA there would be a massive revolt since a lot of this is entitlement programs or 3.) debase Uncle Buck making entitlements worthless but paying entitlements.

Our spineless leaders who looted entitlements and created mountains of debt for their bread and circus elections will take door 3. They are inept, in trying a controlled crash into the terrain they will auger it in destroying Uncle Buck and blasting us into Zimbabwe USA.

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Re: What happens to mortgages during high inflation?

They are inept, in trying a controlled crash into the terrain they will auger it in.

Yes. What the h*ll is it with the Keynesians and their belief that they can 'control' the market. Has there ever been any precedent for that? Why do so many people still believe in that nonsense?

I suppose if by 'control' they mean steer it into the ground then there is plenty of precedent for that.

Yes my whole post is rhetorical. Sealed

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Re: What happens to mortgages during high inflation?

When looking at current home values, and what might happen, I think Patrick Killelea's site makes some very strong points.  The 10 items listed on the left of his front page make lots of sense:  http://patrick.net/housing/crash.html

 

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Re: What happens to mortgages during high inflation?

Chris. This is why you have a major website and I don't. Embarassed

The last paragraph pretty much sums up what I meant. And I wasn't kidding about changing the last post-facto. What I believe COULD happen is that they government would step in as an enforcer of debt to the banking system, and rewrite contract law under the pretense of "saving the system from apocalypse", then scale up everyone's fixed rates in proportion to inflation. It's the most frustrating part of watching Washington work these days. They seem to take carte blanche in invoking arbitrary rules under the pretense of "emergency"

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Re: What happens to mortgages during high inflation?

Thats an interesting comment Morpheus.  The idea of a wealth tax keeps popping into my head as being quite likely.  The numbers out there are getting exponentially worse.  The government might have no choice but to do a progressive wealth tax on stocks, bonds, and cash.  Makes me want to go buy a bunch of stuff before the cash is taken in one form or another.  Geez, I guess thats an inflationary comment in itself - but not for reasons of devaluation but rather fear of wealth taxation!

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Re: What happens to mortgages during high inflation?

Thanks for the link rickets.  I thought it was interersting to note that the list of people who think that housing prices will rise are the same folks who get to make the rules (.gov and banks mainly) and the logical rules (higher interest rates, retirees, flood of forclosures waiting in the wings, etc.) dictate a continuation of falling prices.  CM and Morpheus make a good point about contract law and what's been done so far during this crisis.  Just connecting the dots between what should logically happen and what .gov/banks want to have happen.  Haven't we all been surprised again and again by how this crisis has unfolded since the Fall of 08'?  Why should logic rule going forward?  Will logic eventually rule? 

Well, that said, I still feel nervous about renting even with my home worth less then I owe.  The idea of increasing rents at some point and the possibility of inflation say to me "stay where you're at".  Having 3 pets and wanting stability for my kids when they come HOME is something that I can't help but keep in mind.  I say it's a gamble either way.  We'll see.

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Re: What happens to mortgages during high inflation?
derfman64 wrote:

It seems to me that hyper-inflation would just reward those with too much debt (mortgage, car loans, HELOCs etc...) and hurt those who have saved and maintained manageable debt. Wouldn't deflation be the greater worry here?

EXACTLY!  And who's the biggest debtor in the history of mankind? The U.S. Federal Government. That fact alone, more than any other, argues for a hyperinflationary outcome. IM(also economic ignoramus)HO

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Re: What happens to mortgages during high inflation?

Thanks everyone for great answers. You confirmed things I had suspected but wasn't sure about.

My wife is interested in looking for another house.  Although we're not under water on this house, the link that rickets provided is very convincing that we should wait.  The problem is that when we want to look for a house when the prices are low, it will be hard to sell our house.  The solution to this is to sell now and rent, then buy when prices come down. But, then there's the uncertainty of the future.  Will I have a job and qualify for a mortgage when I'm ready to buy?  I think this is what rocketgirl was saying.  I'd rather take my chances with what I have now then get stuck in a bad situation where the rent keeps going up and tracking with (hyper)inflation.

Morpheus wrote:

The last paragraph pretty much sums up what I meant. And I wasn't kidding about changing the last post-facto. What I believe COULD happen is that they government would step in as an enforcer of debt to the banking system, and rewrite contract law under the pretense of "saving the system from apocalypse", then scale up everyone's fixed rates in proportion to inflation. It's the most frustrating part of watching Washington work these days. They seem to take carte blanche in invoking arbitrary rules under the pretense of "emergency"

I agree, the government could just change the rules of our mortgage contracts as they've done to other contracts recently.  However, if they did that wouldn't it mean that most home owners would get priced out of their homes?  I'd think there would be massive revolt if that were to take place.

 

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Re: What happens to mortgages during high inflation?

I've looked at it one other way. Let's say right now, you want to buy a house and need a $150K mortgage. You can currently get a 30-year mortgage at 5%, for a monthly payment of $805.23. Now, let's assume that house prices will continue to drop, as I believe they will, AND, interest rates go up from here, also as I believe they will. Let's assume the home prices drop so in a year or 2, you only need a mortgage of 130K, but that interest rates are now up to 7% on a 30-year. The payment is now $864/month.

So to me, I'd rather lock up debt at a lower per month cost now while I can, insulate it, grow food, buy more gold, etc, and obviously hope for the best.

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Re: What happens to mortgages during high inflation?

I am new to posting on the boards but, I have been coming here for over a year now. And I must say, the Crash Cours has really been an eye opener for my husband and me. So thank you Chris for the great information and, thank you to the people that continue to bring us great information on a daily basis.

 

To my question, since it is not a good time to buy, which I feel is correct. Should we refinance? We get quite a few offers for this but, my husband is not so sure it is a good idea. We have a mortgage of $146,700 with a 6.0% interest. This  was the  interest rate when we baught the house 4 years ago. Should we take the plunge and refinance for a lower interest rate being that the rate is lower than what we currently have. It will be a fixed rate, the same as we have now. Any suggestions?

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Re: What happens to mortgages during high inflation?
mackswife34 wrote:

I am new to posting on the boards but, I have been coming here for over a year now. And I must say, the Crash Cours has really been an eye opener for my husband and me. So thank you Chris for the great information and, thank you to the people that continue to bring us great information on a daily basis.

 

To my question, since it is not a good time to buy, which I feel is correct. Should we refinance? We get quite a few offers for this but, my husband is not so sure it is a good idea. We have a mortgage of $146,700 with a 6.0% interest. This  was the  interest rate when we baught the house 4 years ago. Should we take the plunge and refinance for a lower interest rate being that the rate is lower than what we currently have. It will be a fixed rate, the same as we have now. Any suggestions?

I would definately refinance.  You should be able to find one that can roll the closing costs into the new loan and still save around $100 a month.

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Re: What happens to mortgages during high inflation?
goes211 wrote:
mackswife34 wrote:

I am new to posting on the boards but, I have been coming here for over a year now. And I must say, the Crash Cours has really been an eye opener for my husband and me. So thank you Chris for the great information and, thank you to the people that continue to bring us great information on a daily basis.

 

To my question, since it is not a good time to buy, which I feel is correct. Should we refinance? We get quite a few offers for this but, my husband is not so sure it is a good idea. We have a mortgage of $146,700 with a 6.0% interest. This  was the  interest rate when we baught the house 4 years ago. Should we take the plunge and refinance for a lower interest rate being that the rate is lower than what we currently have. It will be a fixed rate, the same as we have now. Any suggestions?

I would definately refinance.  You should be able to find one that can roll the closing costs into the new loan and still save around $100 a month.  It should pay for itself quite quickly as long as you don't move in the next year or two.

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Re: What happens to mortgages during high inflation?

 

  Hi All,

   We just renegotiated our mortgage from 3.6 variable rate to 2.35 (-.65 below prime) and paid a $600 penalty but no fee to lock in when we want to.  The term is 5 years.  This is in Canada and we have a small house.

  I totally agree with Chris that having as little debt as possible is the way to be.  At the end of the day even if you've completely anticipated Nostrodomos-like the direction of the housing market and inflation, you might still be faced with the following possibilities:

a) you don't have a job in the future
b) you're able to pay off your mortgage with your 10 ounces but starve to death due to higher food prices
c) the governement/banks change the rules or get a bailout

  A word from someone who lived through the crisis that hit Argentina would be interesting and enlightening to hear right now.

  Finally a question I have is even if you pay off your house could you still be over burdend with land taxes eventually forcing you out of your home?

 

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Re: What happens to mortgages during high inflation?

I am sure the the Government will step in to "help the people" and declare a temporary moratorium on mortgage payments and in "the interests of equality and fairness" forbid any payments whatsoever. 

This will allow the banks to keep the balances until the money is "revalued" and the price of gold "properly fixed."

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Re: What happens to mortgages during high inflation?

Rent vs Buy Calculator - NY Times

http://www.nytimes.com/interactive/business/buy-rent-calculator.html?_r=1&oref=slogin&ref=patrick.net

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Re: What happens to mortgages during high inflation?

Hi, Nex_s,

I don't know about Canada, but there is a legal way to have your property removed from the county tax rolls in America. As I am just a renter now, I have not actually gone through the process myself. But, I intend to do so once I identify the farm I am looking for. You are right to assume that they can literally tax it right out from underneath you- not a good prospect at all. Where I am located, southern Florida, we have seen 15 and 20% property tax increases- PER YEAR. Once the bloodsuckers (county politicians) smell money, there's no stopping them. They would much rather zing everyone in the county than cut back the number of county employees. Somehow you need to be able to get the property out from under their thumbs- or there is no true freedom. If you are unable to get off the tax rolls in Canada, I would certainly move- just my opinion.

 

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Re: What happens to mortgages during high inflation?

 

Horstfarm 

Thanks for your reply.  I'm not aware of any such way to remove your property from taxation.  Which brings me to another point.  Why is it that if you renovate and improve the look of your property, thus improving the look of your neighbourhood, that you get taxed more!? Huh?  That'd be like giving more chores to the child who kept their room tidy.  I understand that improving the look will give it a higher appraised value but shouldn't that be left to the real estate market to sort out. when you go to sell your home.  Sorry just ranting a bit :)

Thanks again

nex_s

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Re: What happens to mortgages during high inflation?
horstfam wrote:

Hi, Nex_s,

I don't know about Canada, but there is a legal way to have your property removed from the county tax rolls in America.

 

I think that you are mistaken in this belief about being able to remove your property from the tax roles. Please tell us exactly how you think this is possible. Thanks,

Ken

 

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Re: What happens to mortgages during high inflation?

I know how to remove a property from the tax rolls in the State of Minnesota.

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Re: What happens to mortgages during high inflation?

We set aside enough half-ounce silver rounds to pay th eproperty taxes for 3-5 years, and will add to it little by little. Our state (South Carolina) accepts gold and silver as legal tender.

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Re: What happens to mortgages during high inflation?
safewrite wrote:

Our state (South Carolina) accepts gold and silver as legal tender.

Where do you look to find out if your state is one to do that?

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Re: What happens to mortgages during high inflation?

 

Where do you look to find out if your state is one to do that?

I have no idea; it was in our local paper.

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Re: What happens to mortgages during high inflation?

 

Where do you look to find out if your state is one to do that?

I have no idea; it was in our local paper.

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Re: What happens to mortgages during high inflation?

As I real estate broker and new to this teaching, i find myself confused about what to do and how to embrace the future.

 

I am considering a HAMP remodification or perhaps, selling short since I am upside down on my 80/20 mortgage deal.  I understand that the only good mod is a permanent full recast and not a "trial" loan mod.  I also see the benefits in a short sale, getting out from under and renting to start over.  Not sure about a short refi and the new regs about that. ( I have trouble trusting the banks and govt).  To be honest, I'm frustrated with real estate as a career and not sure about it's potential as income during the next 20 years of change.    Having said all that, is anyone willing to share their thoughts about the best way for me to prepare for the future and align myself  with the truths we all need to face?  Should I pursue short sale, loan mod, or short refi? 

 

thanks,

mark

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If you are happy with where

If you are happy with where you live lock in a fixed rate.  homes will keep up with inflation better than the dollar. (we won't have inflation for a year or two -- so you have some time. imho).  The nightmare would be an adjustable rate mortgage as interest rates start rising.

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