Is Inflation Back? Houses Are An Inflation Hedge!
The only thing that ravaged the 1970s more than the bad music, hair and clothes was the high rate of inflation. High inflation rates hurt economies b/c they create uncertainty, increase interest rates and decrease purchasing power and economic investment, among other things.
Inflation is primarily a result of the Fed printing or creating too much money.
INFLATION = NON-FACTOR SINCE 2008 MELTDOWN
Inflation has been a non-factor since the 2008 meltdown, which surprised many b/c the Fed effectively created over $4 trillion of new money with its bond buying.
Last week, however, when reports of wage inflation surfaced, the markets panicked, with both stocks and bonds plummeting in price. Inflation reports are one of the few pieces of news that push bond and stock prices in the same direction.
Most economic news pushes stocks and bonds in the opposite direction; what’s bad for stocks is often good for bonds. Higher unemployment, for example, will usually push stock prices lower and bond prices higher.
Investors panicked last week b/c they know how badly inflation ravaged the 1970s, and they know how much new money has been created over the last ten years (so everyone is waiting for the inflation shoe to drop).
WHY INFLATION HAS BEEN IN CHECK
Nobody knows exactly why we haven’t seen more inflation, but a couple suggested reasons include technology and slow economic growth.
Improving technology is lowering the cost of consumer goods so much that it is offsetting potential inflation effects. Big screen TVs are the often-used example. Fracking technology is another factor, as it vastly increased the supply of energy and effectively lowered the cost for most everything.
Slow economic growth is another factor, as it inhibits demand overall and it prevents money from turning over in the economy.
REAL ESTATE AS INFLATION HEDGE
We have seen inflation in some areas, particularly with respect to assets like stocks and real estate.
People who did well in the 1970s were often those who owned real estate, especially if it had been financed with low fixed rate loans.
B/c real estate is a hard asset, it is often an excellent inflation hedge. In overly simplified terms, if you buy a home for $100,000 and the money supply doubles, your house should be worth $200,000. This is effectively what happened to homeowners in the 1970s, and it is partially what happened to homeowners who bought in recent years.
My main point: Buying a home as a potential inflation hedge is another excellent benefit of buying, and it is something that every Realtor should tell his or her client.
Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167
