Money supply inflationary pressures, slumping economy, growing debt: buy a house?

Economics Economics Questions
1

We’re about to need a place to live, and carefully considering the long-term implications of buying vs. renting (sitting things out a while). It’s a painfully immediate and practical application of my own layman’s understanding of the vast economic forces out there.

Would any of you be willing to help on the analysis end? Give us ideas as to what might be best?

The US money supply is rising rapidly. Increases in the money supply may not have resulted in much inflation yet (perhaps because the initial recipients such as banks are mostly sitting on the new money?). Surely the inflation will come, perhaps even rates unprecedented (at least, for the US). I suppose nobody can say for sure precisely when, or precisely how steep the rises will be.

Housing values are retreating. Not much in my area, but still some. We’re selling our house for reasons unrelated to the overall economy, and we are taking a small loss. Perhaps this trend will continue (slumping housing prices) because we’re in the bursting part of a housing bubble pumped by artificially low interest rates, among other sources.

There are probably other forces at work here. I am no economist, but rather an interested layman. Thomas E. Woods Jr.'s “Meltdown” made sense to me, as does much of the Austrian School’s approach to these matters.

What would you do in our shoes? Buy a home ASAP, assuming that whatever slump is on the horizon will quickly be erased by inflationary pressures? Rent and wait things out, assuming that the inflationary pressures will come to the fore later, or will not be enough to re-inflate the housing bubble (or at least keep it from deflating much more).

My wife and I are disposed to wait things out a while, but we’re also willing to be convinced. What do you think, and why?

2

It depends on where you live. If I had capital saved up, and could pay off the majority of a house, and had a stable job I would buy a house. In San Diego, you can buy a house worth half a million dollars before the slump for around 150,000. At those prices, I would definitely buy property. Except in cases of eminent domain, while the government can confiscate your savings through inflation and taxes, physical property is less difficult to steal. The only problem with buying a house are high property taxes, if that’s the case where you live. You also have to watch out on the type of loan you take out of a bank, if you do; variable interest loans should be avoided.

Nevertheless, my point is that when high inflation rates come about physical property will be more valuable than money, as the value of that money will quickly dissipate.

3

I can give all the details you want if that’ll help. We’re in Colorado Springs. Prices have not slumped much, I suppose because they never rose much either. In my neighborhood, we were getting an appreciation of maybe 1% yearly for the first few years, and now we’re seeing some reductions in prices.

In the last five years, during which we’ve lived in this place, we’ve fixed it up to the tune of about 8-10% of the original purchase price, not to mention the usual maintenance.

Now we are selling for about 4% below what we paid for it.

We aren’t going to take a variable rate on the loan. We have very low property taxes here (rather less than half a percent of the home’s value).

If we buy again, we’ll be buying in the same city, but a vastly different area. Does that help?

Yes: inflation will skew things back toward real goods, and reduce the value of fiat money. That’s the first half of my thought: if inflation hits soon, and if it overcomes the continuing deflation of the housing bubble, then owning will be best. But those are two big ifs, no?

4

Some very general thoughts on rent and buying a house. Source in brackets after the sentence.

  1. Whatever is wrong with this country’s economy won’t be fixed for many years, and will get way way worse before it gets better. [Austrian Economics].

  2. Forget about a house as being an investment. It’s an expense. And a constant expense, too, what with upkeep. [Peter Schiff].

  3. Rents are bound to go lower, because there are so many houses on the market. There are also houses that the banks own but are not putting on the market cause it will drop housing prices even lower. Another reason rents will go down is because people are broke and jobless and can’t afford high rent. [Schiff]

Of course rent may go higher cause of inflation. But if your money is invested in some way that saves you from inflation [see 5], you will still have the advantage of rents getting lower in real terms.

  1. Just as the govt bailed out the banks by giving them cash, so too they are bailing them out by doing everything possible to keep house prices up. Cause if they go down, who loses big time? The banks, who gave loans on those houses. Because people will walk away from the loans. After all why pay a $200,000 mortgage on a house worth half that, or a third that? [Schiff]. So it may well be that the govt will bail out the banks in yet another fashion too. Mainly, if you have a fixed rate mortgage and inflation strikes, they may pass a law saying the loan can be reset by the bank. [A poster here].

  2. Just as you have to pay for food one way or another, you have to pay for a place to live one way or another. So rent is not “wasting your money”. [Schiff]

  3. If you have a bit of money, why buy a house in uncertain times? Is it not better to find a reliable expert who can advise how to invest that money so that you are making money from it, as opposed to losing money from it [in upkeep of a house]? [me]

  4. Losing only 4% on your house nowadays is incredibly lucky, it seems to me. [me]

5

Dear Smiling Dave,

Thanks for that. Let me respond point by point

0 - I am quite aware of that, and believe it. It doesn’t quite answer, for me, whether [hyper]inflation will overwhelm the housing slump, though it is a hint in the right direction.

1- absolutely. We don’t think our house will be an investment. There are, however, very good reasons for us to own one. For example, our sons are both adopted from overseas, and they both have special health needs. Having room around us is a huge plus. Also, we home school them, which is far less likely to arouse the ire of ‘helpful’ citizens nearby, if you live in a house rather than apt or even rental home.

2- yes, rents may well go lower because of the number of people losing their jobs. On the other hand, we’ve seen a huge shortage of rental properties locally, for very much the same reason: people are losing their jobs, then their homes, and what’s left? They rent.

3- this argument seems to favor the idea that prices won’t slump too much farther. we had considered that.

4- never thought rent was wasting our money, but we know that some do, so it’sa reasonable thing to say.

5- not a bad idea, to invest in a safe(r) haven with extra money. We are considering that.

6- well, if you count what we put in (new driveway, new flooring, new paint, new siding, new patio, new landscaping) as part of the basis, and take the 100% as par and add, oh, 8% more (forgot what I wrote precisely, but somewhere in there), so now you’re at 108%, and we’re selling at 96% or so, so overall it’s a loss of something like 11%. We’re still happy to do this, for other reasons, and we are definitely glad it wasn’t worse!

Thanks again. Great input.

6

No more thoughts on deflationary post-bubble pressure on housing prices vs inflationary money-pumping pressures - as to which of those two will win, and when? I’d be glad for input, really!

7

That’s one for a crystal ball, not a human being.

8

Regarding price inflation, a new forum member recently linked an analysis of CPI expecting it to see a rise of over 20% within 1 year, see https://forum.freecapitalists.org/t/what-kind-of-inflation-can-we-expect-if-the-monetary-world-gets-back-to-normal/11426 This seems to rest well with my gut feeling of 20-25% annual inflation within 3-4 years and currency collapse within 20.

I believe the real estate market still has a few years to go to reach bottom, some have conjured them returning to 1965 price levels! I wouldn’t be surprised if the more boom prone areas bottom near 75% of their peak. Gotta love those granite countertops in formica neighborhoods … lol

If I were in your boat, I’d shop long and hard for a super bargain on a humble house in a low property tax area, finance most of it for 30 years, and put the balance in other semi-liquid commodities like oil, precious metals, and agriculture.

9

Bro that buy vs. rent decision depends so much on where you live.

Here in I would never buy a house for two reasons:

1-high property taxes

2-expensive insurance

We get violent hurricanes from time to time plus floods. Insurance is therefore extremely expensive and they take time to pay you and most of the time they don’t cover you 100%.

Most local governments are so inefficient and expanded their programs during the housing bubble. Now they have no option but to keep property taxes high. A regular house pays from 5,000 to 7,000 annually.

So…in I will have peace of mind by just renting a nice place.

Hope this helps.

10

@bbnet - great input. Thanks so much! That CPI analysis post is very helpful. It would not surprise me in the least if real estate were still another 2-3 years from bottom.

11

@wolfman - it really does depend, doesn’t it? We have low insurance, relatively speaking (yearly, about 1/2% of house’s value) and taxes are about the same, give or take. Still, if the bottom is still a couple of years out (and I realize nobody knows this for certain, so it’s all guesswork to a degree), that changes things too.