Yes, We Have Inflation Now – ASSET Inflation; Real Estate = Inflation Hedge
When I tout real estate as an inflation hedge, I often get comments like this: “Dude, we are seeing DEFLATION now; INFLATION is the least of our concerns….”
I then get examples of items that are far less expensive now such as gasoline, cars (way cheaper now for all the tech, speed and safety we get), printers ($99 for an “all in one”), computing power (iPhone power would have cost over $1 billion in the 1970s), big screen TVs, bottled water, and even labor (overseas Virtual Assistants cost $1,600 per month).
Those comments, however, confuse “Consumer Price Inflation” with “Asset Inflation.”
Consumer prices, like those listed above, have been falling continuously over the last 40 years for a variety of reasons – including improved technology (the biggie), more efficient distribution systems, less expensive energy, overseas competition, and – most recently – a sharp decrease in overall demand b/c of economic problems.
Asset prices, in contrast, for items like real estate and stocks have gone through the roof. The Dow Jones Index, for example, dropped to a low of $6,541 in 2009 but is now over $26,000 – an increase of almost 400%!
The median U.S. housing price bottomed out around 2011 at $170,000, but has since increased to over $320,000. In hot markets like the Bay Area and Austin, TX, we have seen even faster appreciation – with prices more than doubling in many areas.
The reason we see this massive disparity in asset prices vs. consumer prices is Fed Policy. For almost 30 years now, the Fed has been keeping interest rates artificially low and pumping money into the economy at record rates to fight off economic downturns.
All that cash has to go somewhere, and it invariably ends up in assets one way or another. And this always has the effect of pushing up asset prices.
What’s more – the Fed is only doubling down on this policy – so we are all but certain to see much more asset price inflation.
So yes, there is very little consumer price inflation, but there is and has been massive asset inflation.
Real estate continues to be one of the best ways to both hedge against and take advantage of asset price inflation.
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