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Effects of inflation on house prices?

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Effects of inflation on house prices?

Old 01-25-2012, 04:40 PM
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Default Effects of inflation on house prices?

Someone must have thought this through. We are at a mild inflation rate and very low interest rates. If inflation stays low, so does interest rates so what happens to home values if inflation climbs further? I'm assuming higher inflation drives up home values while higher interest rates drives down home values as fewer will be able to afford the price point.

How does it work out?
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Old 01-25-2012, 04:56 PM
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Unfortunately it's not that straightforward. If you've ever heard the term biflation, they are generally referring to the phenomenon when consumables go up in price, with a corresponding drop in high dollar assets like cars and homes.

Inflation and high interest rates can make it easier forpeople to get out of debt. If costs increase by 25%, and interest rates go up, and I still owe a good chunk on my fixed rate mortgage, my debt is now a smaller percentage of my earning potential, it looks like I have a very favorable interest rate on my mortgage, and I can get a higher yield from my money market.

Inflation helps the debtor, but hurts the saver. The money that he put aside is now worth less than it was before inflation.
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Old 01-25-2012, 04:59 PM
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My guesses:

- Inflation will push up the price of new construction.
- the price of existing homes is determined by the oversupply of vacant homes. Inflation of wages will just make the homes attractive to more buyers, but existing home prices will continue falling as long as oversupply continues and people are desperate to sell.
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Old 01-25-2012, 05:15 PM
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Yeah..housing prices aren't going up anytime soon, regardless of inflation. As folks love to say on here..its a buyers market.
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Old 01-25-2012, 05:17 PM
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*VERY* hard to predict because both variables are being artificially controlled. Interest rates are being kept low and the true housing picture isn't being shown because there are a great more properties that are being "held".

I can make some assumptions...
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Old 01-25-2012, 05:27 PM
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Originally Posted by OldPete View Post
I can make some assumptions...
That's what we are here for!

I'm debating the buy vs rent issue.
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Old 01-25-2012, 05:34 PM
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3% that's what they always were until this stupid junk happpened 15 years ago.
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Old 01-25-2012, 06:38 PM
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Originally Posted by jking View Post
That's what we are here for!

I'm debating the buy vs rent issue.
LOL. If the boys raise the rates 1/2 the country will prosper and 1/2 will sink.

The housing market is the big variable... if you think there is lots more inventory then you need the rates to stay low longer. If you think there isn't a huge inventory waiting to be sold -- then rates mean a little less.

That's just housing and rates. There are LOTS more variables to look at!
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Old 01-25-2012, 06:44 PM
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At any particular time, home prices are dictated by supply & demand, not the cost of construction. But, there won't be much new supply so long as the finished value doesn't exceed cost. Cost has two components, and land is a big one. Land has already been provided (ie, God already made it, no one has to be paid to go produce it; I am ignoring the cost of improving it, which is not fundamentally different from the cost of construction the house), so supply / demand can radically drive down the price of land. Nevertheless, in the long run prices must increase as fast as inflation to assure continuing supply. But, as population grows, so does demand -- that shifts prices upward faster than inflation alone. Demand also increases as productivity increases (since, in the aggregate, people have more wealth, some of which is paid for better housing). On the downside, houses loose value as they become obsolete. It is hard to generalize, but I would suggest that in some markets, at some points in the economic cycle, home prices can be confidently expected to exceed inflation plus about 5%. That's my theory and I am sticking to it.
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Old 01-25-2012, 06:54 PM
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Originally Posted by jking View Post
That's what we are here for!

I'm debating the buy vs rent issue.

A few years ago, I would say rent until housing hits bottom. Why buy a depreciating asset?
Now, I believe we're very close to bottom. With historic low interest rates, home prices at or close to rock bottom, it's better to buy now even if prices drop a little more.
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Old 01-25-2012, 07:31 PM
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Originally Posted by bobb View Post
A few years ago, I would say rent until housing hits bottom. Why buy a depreciating asset?
Now, I believe we're very close to bottom. With historic low interest rates, home prices at or close to rock bottom, it's better to buy now even if prices drop a little more.
That was the theory I just recently went with...kind of haha. I am not exactly an economist, but I was debating whether to continue renting or buy and after looking at all the numbers I went with buy. I ended up purchasing a 5 year old duplex that originally went for $340k (plus additional modifications) and paid $250k. My rate for a 30 year fixed was mid 3%, with a required 3.5% down, although I put around 8%, not as much as I would have liked but I wanted to keep some savings. With an FHA loan I am required to pay "PMI" at $250 a month for the first 5 years. My rent was costing me $1,300 a month plus utilities and now I am paying $400 a month more towards my own home that is twice the size of my rental, has a garage, 1.5 acres of land that is mine and mine only, and now more tax deductions.
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Old 01-25-2012, 07:37 PM
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Originally Posted by burtonboards32 View Post
That was the theory I just recently went with...kind of haha. I am not exactly an economist, but I was debating whether to continue renting or buy and after looking at all the numbers I went with buy. I ended up purchasing a 5 year old duplex that originally went for $340k (plus additional modifications) and paid $250k. My rate for a 30 year fixed was mid 3%, with a required 3.5% down, although I put around 8%, not as much as I would have liked but I wanted to keep some savings. With an FHA loan I am required to pay "PMI" at $250 a month for the first 5 years. My rent was costing me $1,300 a month plus utilities and now I am paying $400 a month more towards my own home that is twice the size of my rental, has a garage, 1.5 acres of land that is mine and mine only, and now more tax deductions.

I think home ownership is going to boom again soon. Once people realize that these are historic low interest rates, coupled with low home prices, the market will turn... It really is the opportunity of a lifetime.
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Old 01-25-2012, 07:48 PM
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Originally Posted by bobb View Post
I think home ownership is going to boom again soon. Once people realize that these are historic low interest rates, coupled with low home prices, the market will turn... It really is the opportunity of a lifetime.

Half full or half empty.... I counter your low prices/ low rates with historically high national debt that keeps climbing with little to no intent on stemming the tide. I guess the real question comes down to political intent but lets leave that off the table.

I'm looking in the Boston area and I don't see much of a decline in prices. Many asking prices seem higher than 06-07 which is concerning.
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Old 01-25-2012, 07:54 PM
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Originally Posted by jking View Post
Half full or half empty.... I counter your low prices/ low rates with historically high national debt that keeps climbing with little to no intent on stemming the tide. I guess the real question comes down to political intent but lets leave that off the table.

I'm looking in the Boston area and I don't see much of a decline in prices. Many asking prices seem higher than 06-07 which is concerning.

I'm not quite sure why your comparing home ownership, low prices, low interest rates and it being a great time to buy with high national debt....

If your looking in the Boston area, especially in the city, don't wait too long as prices in many areas have already rebounded....
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Old 01-26-2012, 02:44 AM
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Originally Posted by jking View Post
I'm looking in the Boston area and I don't see much of a decline in prices. Many asking prices seem higher than 06-07 which is concerning.
Are they selling at ask?
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Old 01-26-2012, 03:59 AM
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When we start looking at "homes" rather than "houses" our paradigm shifts from an equity investment to a personal investment. If you want a home then buy, if you want a house then rent. Buy the best home you can afford … or… rent the minimum house that meets your daily needs and invest/play with the rest. There is no " right" way to proceed in this ever changing market, rather our life strategy should be supported by the tactical everyday decisions we make.

However, the existing housing market prices are/is determined by what the last home sold for, no immediate correlation to inflation.... depressed market with inflation = prices still fall. New houses on the other hand are directly affected by the inflationary tide… and large builders will always have an edge, 'cause they buy land at deflated prices (now).
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Old 01-26-2012, 06:28 AM
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Originally Posted by yarcraft91 View Post
My guesses:

- Inflation will push up the price of new construction.
- the price of existing homes is determined by the oversupply of vacant homes. Inflation of wages will just make the homes attractive to more buyers, but existing home prices will continue falling as long as oversupply continues and people are desperate to sell.
Bingo.....
There are so many homes on the market now in foreclosure you won't see home prices come back up for a long, long time if ever with the way other prices, have risen . There are counties in NC where the banks have taking back over 3 out of 10 homes. Personally I don't think you will see home prices go back up. Cars, medical, food,,, the things everyone has to buy daily has grown so fast in the past two years 50% are just getting by. Now is a fantastic time to buy but selling is almost out of the question .
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Old 01-26-2012, 12:46 PM
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Interest rates are going to be low for a while..... and by the time they go up housing will be stabilized..

Its time to buy and lock into long term debt.... or not and miss the certain appreciation ... well at least I hope so....
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Old 01-26-2012, 01:02 PM
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I'm just a stupid old fool. But one thing I know - is that the economy is stalled until the housing market recovers. The recovery is completely dependent on getting rid of the inventory of short sale and foreclosed homes.
I believe the FED (and I hate the bast'ds) can make that happen by:
1. Eliminating making loans to those who can't afford them (thet's right, they're still pushing the practice),
2. Demolish the homes in a short or foreclosed state that are in poor shape (many have been gutted by those who have walked from them) or constructed before 2005 (Miami Dade construction standard - I may be wrong abt the year). You say crazy? Well the price they're getting for these homes are pennies on the dollar compared to the bath the gov't is taking anyway. So suck it up and waste a few dollars more and destroy them - remove them from inventory.
3. Minimum price for the balance of homes in the foreclosed/short sale status is what it would cost today to construct the house.
By NOT doing this, the govt is creating a second crisis; that is, people with means walking from their existing mortgage (even though thay can pay) and buying for cash a steeply discounted property. Many are willing to survive their credit hit for 7 years to save 10's to 100's of thousands on their home. I know some of them and it thoroughly disgusts me.
The ONLY way to recovery is to repair the housing market.
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Old 01-26-2012, 01:45 PM
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Houses are as cheap as your going to see and interest rates are at historical lows. The supply is there. Demand is the problem. The good news is that kids become adults and need a place to live that's not with their parents. It happens every day. Clinton thought this group should all own their own home. The phrase, "the world need ditch diggers too" can also apply to housing. I think the over supply will be fixed when the wealthy buy the inventory cheap and rent it until they sell it for what they should get. When they do sell the morgage companies will be a little more conservative when approving loans for the buyers. Then this mess irons itself out.
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