Inflation isn’t something that causes all prices to rise at the same rate.

Over that last few years, housing and stock prices have inflated much faster than any other types of assets. Energy, health care, education, and gold prices have also seen a lot of price inflation. HOWEVER, salaries for the lower and middle classes have inflated at MUCH lower rates, making it IMPOSSIBLE for them to afford to buy the houses at anywhere near today’s inflated prices without resorting to suicide loans (which will end in foreclosure). I don’t see anything that will cause wages to rise substantially for most people. This is not like the 70’s where wages inflated along with almost everything else. If people try to demand higher wages, companies will just fire them and send the jobs to China, India, Mexico or a host of other countries. So yes, I feel the Dollar will keep losing value and we’ll have to pay more for a lot of imported goods as well as energy and other commodities but people’s wages will NOT increase much, so they will have to either (1) cut down their spending to the bare necessities and not buy an overpriced house or (2) keep running up debt until they go broke and end up doing #1 eventually.

I have no emotional issues against renting and I may never buy a house again but IF I do, it probably won’t be for a least a few more years. The price declines are just BEGINNING to get serious and it’s still much cheaper to rent vs buy. My preference is to invest in stocks in foreign countries with stable currencies and to invest in commodities or related stocks/funds. I believe these will yield higher real returns than houses. Housing to me has way more downside risk than upside potential right now. I like to keep most of my $$ in FDIC insured CD’s but I put some of it in inflation-hedge type investments as noted above.

Another problem with using your house as an inflation hedge is that it’s very illiquid. What if you get laid off and have to move to get a decent job? You can’t predict the timing of something like that and you may be stuck in a log-jam. What if you get a great job offer in another city but it comes at I time when house prices have fallen below what you paid? Would you take a triple digit loss or forgo the job opportunity? The house could become a noose around your neck in these cases. I see no benefit to buying in a declining market. You’d have to be pretty DARNED sure you could ride out the entire downturn in that house and I think very few people in our economy are that sure of anything.

If inflation truly starts to rise, the Fed has indicated over and over that it will raise rates in response. Mortgage rates will ultimately rise, making housing less affordable (on a monthly basis), thereby forcing housing prices down severely. So the current mortgagee may have an easier time with his mortgage payment, but he won’t be able to refinance, and worse yet, the mortgage cost might vastly exceed the value of the depreciating house. I don’t see runaway inflation as a threat at this time, though.

That said, the uptick in the yield of the 10-year should be of great concern to homeowners, as that will also push up mortgage rates (which are, in fact, currently rising.) That’s bad news for an already beleaguered housing market.

This has been discussed 100 times on this board. The US has no choice but to borrow money from overseas to finance its monstrous account deficit. If the yields don’t compensate for inflation, no one will buy the paper. If China, Japan et al start to take their money elsewhere, the rates MUST go up to bring the buyers back or the US govt goes bankrupt in a couple of days. It is that serious, no fooling. There is no money left in the federal kitty and the foreign money is the only thing left to keep it going. China and Japan demand will determine our interest rates, the federal reserve and US govt are prisoners at this point. Yes inflation is going up and yes rates are going to go up to match. That will drive home prices down as well as the cost of that extreme leverage gets expensive in a hurry as the rates go up. The savers still win as long as they buy short-term instruments (6-month CDs, etc…)

Kibu, dude, buying a house in San Diego from 2003 to now as an inflation hedge is not the smartest thing to do. That same house is facing a major huuuuge DEFLATION. What planet are you from?

In addition, someone who bought in the same period would be getting double-whammy hit both sides (redundant?):
a) his food, clothing, gas, and utility costs would squeeze him, and
b) his deflating net-worth equity from the alligator-house would squeeze him into not being able to move.

The person with the cash only deals with the former.

Also the person with cash can invest it in other currencies. I haven’t done this yet but will be researching it. I am much more comfortable with the responses to the thread so far than the original premise. Some of the arguments hold up – but not in the face of decreasing values. While mortgage rates are low today – they are rising and isn’t the current situation (despite what the government states) a stagflation? Where wages don’t go up but true inflation is rising? Add college tuition and the free spending habits to the list above. We spend more than we ever did as a nation and it’s tough to tell your kids / wife / family that you have to ‘economize’. We are like crack addicts who have become addicted by the easy credit of the last decade. Many folks won’t be able to jump off the cycle in time.

The economy is going to be wacked because the safety net is mostly gone (other than being propped up by China, Japan)… The ball is in their court because the US consumer has negative savings, true inflation, and a weakening and imaginary equity position in housing.

Not to mention that if you are in cash, you can quickly switch to inflation resistant investments. Even in the best of times it takes a month to sell a house. Now is not the best of times.

Josh

Exactly. Move your cash to U.S. Dollar inflation resistant investments. Buying a house to hedge against inflation would be the worst because it is a depreciating asset valued in devaluating U.S. dollars. Double whammy.