It’s a little OT for this site, but I put up a voiceofsandiego.org piece linking to and expounding on a Union Tribune article about how the CPI understates inflation. Check it out, if you can brave the slight offness of topic.
To bring this here post on topic while sticking with the inflation motif, I’d like to quickly address an argument that I hear a lot. The argument purports that inflation has been and will continue to be worse than is widely acknowledged (so far I’m in agreement), so real estate — being a tangible asset — is actually a good investment to hedge inflation risk (oops, you lost me).
There are two problems with this argument. One is that buying tangible assets to protect oneself from inflation is just great as long as one doesn’t ridiculously overpay for said tangible assets. What with home prices’ continued disparity with rents, incomes, and the like, buying a San Diego home right now would be doing just that.
The bigger problem is that real estate is financed, not purchased outright. People have been leveraging 10 or 20 to 1 (or more) on their real estate purchases. So while it’s a tangible asset, it’s actually bought with intangible paper. Further, the cost of financing tends to rise in inflationary times, so if anything the resulting higher rates could put downward pressure on prices even as inflation slowly rendered those prices more reasonable.
As a kind-of-related aside, can you imagine if everyone had to pay all cash for houses? What do you think the median San Diego home price would be in this case? Quite a bit lower, we can safely say, as prices would actually be tied to how much people earn rather than how much they can borrow via layer upon layer of securitization from some chump at a German pension fund.
In any case, due to elevated real estate valuations and the fact that homes are typically bought using extensive leverage, the "housing as an inflation hedge" argument doesn’t hold much water.