Two More Reasons To Buy Real Estate Now

Will – 2011 is looking at an incredibly low inflation rate. Future inflation forecast are looking extremely low too. I am taking my information from the Fed but hey, their forecasts suck time to time.

But in all, inflation isn’t going to be high for awhile for two main reasons. One, the whole recession brought everyone back down to reality; the “real” value of items are starting to be actualized (and in some cases the cost of good is lower than its actual value due to people being conservative in pricing). Kind of like houses, right? The peoples’ purchasing power hasn’t eroded over the past one or two years, prices of common goods has stayed the same. Second, we haven’t really seen the market being flooded with cash or capital. Banks are still cautious to lend our money to the middle class and people who pinching their pennies and dimes. Sure, the government has loaned and given out a lot of money, but where is it? Most of it was to take care of state and local budgets so that they can continue with their day to day operations and move on with planned projects. Some of it was spent to bail our companies who really aren’t putting it out in the market, they just used it to offset their “toxic investments”. We might see how inflation in the coming years, however, I don’t know if anyone can say it is totally attributed to the bailout.

Interesting post and I think the spirit of the article is in the right place, however, I think the math is misleading. The US Census Bureau shows that since 1969, the average median home increases in cost per year is closer to 5% rather than the 10% used in your example. I highly doubt it is reasonable to anticipate a growth of 10% next year.

Also, the correlation between national inflation and home prices is a little weak. First, all economic indicators show that inflation is to remain extremely low. I have yet to find a reliable source that shows inflation will be that high. An inflation of 10% would almost be catastrophic, as that is an inflation rate often seen in third world/developing countries in Africa – Ethiopia just recently had a tuff battle with high inflation rates and I believe they just decreased their inflation rate to about 7.5% recently. The last time the US had an inflation rate that high was back in 1981. Second, inflation doesn’t increase the value of the house. The figure you used of jumping from $250K to $275K is just simply a correlation of comparing today’s cost with previous year’s cost, not necessarily equitable or tangible value. Often, if we were to show the actual increased value of the house, it would simply be a function of increase in market value rate minus that of the inflation median rate over the period of time, ie, for the example, you provide, the house did not increase in value, since the increase of the house cost is equal to the inflation rate. Typically, the inflation rate of the US for the last 10 years is roughly 2.5 to 3.5%, so if the average cost of home increases each year at 5% and the average inflation rate is 3%, the home really increased in value by 2%. Third, if the national inflation rate is 10% higher (and you hope/fingers cross that means your home values is 10% higher), that means all the other stuff you buy, as in gas, food, and other essentials will most likely be 10% higher. Employeers will try to compensate employees fairly but more often than not, increase in wages to compensate for inflation are often months or a year behind the actual increase costs of living. Basically, you effective buying power is less than the previous year’s and you are trying to play catch up. Forth, traditionally when inflation rates are high, the Federal Reserve (aka the “Fed”) will increase the interest rate, which means higher mortgage rates. The Fed wants to decrease the supply of money in the market during times of high inflation.

Finally, your analysis of saying ‘$50k garners in 50% return in a year’ is slightly misleading. A simple time value of money engineering diagram shows that the initial investment of $50K and a uniform distributed load of additional costs (assuming a fixed rate mortgage) through at the rest of the year, then maybe an increase of $25K at the end. Your analysis does not include the monthly payments, let alone the interest included in the monthly payments. So let’s say you have a $200k loan at a 6.5% interest for 30 years. That is about . . .lets use easy numbers here, $1600 a month. That equates to $19,200 a year in payments, or a total of about $69K spent in 12 months when including the down payment. So, in all actuality, the increase of 2% in your example, or $5000, took $69,000. That is a yearly return of 7%, which is still a great return in all actuality in this market. However, it is no where near the 25%. But the real calculation of return should be looked at a longer time frame since they simple ratio of return you provided does not consider your total overall contractual debts – maybe more importantly than anything else, the home value is always, always, always equal to what you paid for it. Any price is just purely speculation and just a fancy/legal form of gambling. A home value is only defined at the time cash or checks exchange hands, not what anyone speculates what it may be.

However, my quick analysis is not to detract from the spirit of this blog. Basically, inflation is great for borrowers, like home buyers, and real estate is still a viable investment for smart investors. But the emphasis shouldn’t be placed on the quick return or immediate satisfaction, as this is what got the US housing market in trouble. Be more concerned about the long term, 10/15/20/40 years from now. Besides, do you want the place you lay your head down at night to be a home or to be an investment? That is the biggest question you have to ask yourself.

With home prices dropping and predictions that we can expect this state of affairs to continue for another year or two, we are definitely in a buyer’s market. It’s highly unlikely that you would have to pay the listing price for any home you bid on.So thats might be the reason.

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Great advice – thanks. Ir really is the best time to invest in property. Wish I had more dinhero to do so.

Avery informative post! If you’re investing in real estate there is a bigger probability it will yield more profits in the next couple of years or so. And if today is a great time to buy real estate, then investors shouldn’t miss this chance.

A lot of people are afraid of buying homes these days, with present situation of the economy. Those who take risks in buying homes are brave enough to do so. But we can’t deny the fact that there are really lots of opportunities out there in home buying.

A quick thought: We not likely to see any wage inflation, because of global outsourcing. This will put pressure on wages until our wages line up with our 3rd world friends. We however might see commodity inflation, if this happens then dollars that would be spent on housing would go to gas,food,ect… If your scenario above happens and we have inflation along with high interest rates: housing prices will collapse. No one will qualify for current house prices with high interest rates and no wage increases, so demand will collapse. One thing I’m sure we can agree on is that house prices will not shoot up from their current levels, too much pain has occured b/c of our last bubble.

Very interesting concept, and I like that you ignored the advice, very bold predictions here. Eventually interest rates are going to go up, a lot, so you have a valid point. The only question is when and exactly how much? I am sure dreading those days…

It is not the right time for me to buy property right now, but I can see that just after the recession could be a good (but still risky) opportunity for others to purchase real estate.