THE REFI BOOM THAT WASN’T
When rates plunged a few weeks ago in response to renewed COVID concerns and weak economic news, the entire mortgage world was gleeful b/c we thought we had another refi boom on our hands.
But alas, it was not meant to be, as strong employment numbers AND INFLATION crashed the party.
So, rates have climbed about 1/4 percent since their low from a few weeks ago.
WHY INFLATION SCARES INVESTORS – IN TERMS OF PORSCHES
As I type this blog, the 10 Year Treasury Yield is about 1.37%.
Let’s also assume inflation will run at about 7.37%, which now seems probable in light of expert prognostications and what we are seeing.
Now, if an investor has $1 million he can either buy $1 million of Ten Year Treasuries or five $200,000 Porsche 911 Turbo Cabriolets.
So in other words, his $1 million today = five Porsche 911s.
The question is: How many Porsches will the poor investor be able to buy in 5 years if he invests in Ten Year Treasuries and inflation runs at 7.375%?
In five years, Mr. Investor’s Ten Year Treasury investment will be worth about $1,070,000.
BUT, the five Porsches in five years will increase from a total cost of $1,000,000 to almost $1,430,000.
So, the poor investor will only be able to buy FOUR Porsches if he invests in Ten Years yielding only 1.37% in an inflationary environment!
And that is a great illustration of how inflation zaps purchasing power, and, more importantly, of why investors demand higher yields when inflation rears its ugly head!
As an aside, this has already happened, as Porsche prices have surged as much as 10% in the last year alone!
This is why JVM has set up a GoFundMe Campaign to help investors who can no longer afford five Porsches.
It breaks all of our hearts here at JVM and it is something we just won’t stand for, and we encourage everyone to contribute.
INFLATION IN TERMS OF HOMES TOO: IT’S ABOUT “BUYING POWER”
While Ten Year Treasuries are only yielding 1.37%, homes often appreciate at the level of inflation – making them a great inflation hedge (like we saw in the 1970s).
But, it is also important to remember that if homes appreciate at the rate of inflation, homeowners are not actually getting ahead – b/c their “buying power” remains the same.
So, if somebody buys a $1 million home today in a world with 7.375% inflation and it is worth $1,430,000 in five years, they haven’t actually made any money if they can still only trade that house for the same number of Porsches.
We all need to remember to account for inflation when analyzing our investment prospects and appreciation, and account for buying power.
If our appreciating assets don’t provide more buying power, our assets have not actually appreciated in “real terms” or after we have adjusted for inflation.
We all need to ask ourselves if we will be able to buy the same number of Porsches in 5 years if we invest in any asset.
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167