Austin Real Estate Blog

Recently we talked about the case for hyperinflation. So what does that mean for real estate (an appropriate topic since this is, after all, a real estate blog)? Before we get started, I want to make clear I do not have a magic crystal ball. I am making no guarantees that hyperinflation will occur or that it will play out the way I outline below. But I am currently basing my financial decisions on the below assumptions so I thought it would make sense to share.

This blog started as a response to a few friends. My blogs on the current state of the real estate market are negative. And recently I have been actively making offers on properties. The question they had was: "Why?".

First off, the National Association of Realtors (NAR) has been saying for awhile now the great recovery is just around the corner. And everything is going to return to just how it was a few years ago. I would still pretty much ignore NAR. They are like some bizarre form of adult cheerleaders.

I don't know when the recovery is going to happen. But when it does I don't think it will be a nice clean recovery. I talked about it more in depth here Hyper Inflation is Coming. Basically, since the government has been pouring money into the economy, once the economy recovers, we should experience hyper inflation.

Let's run a few different scenarios. For all the scenarios, let's assume inflation doubles. I don't know if the effects of inflation will be more, or less (I think most likely it will be less), but it is an easy number to work with and it doesn't affect the percent gain or percent loss. Also for this (adjusted) means adjusted for inflation and dollar or (d) means non adjusted dollar value.

First, let's assume one has $100k, and keeps it in cash.

This is what has me freaked out. I don't like the idea of losing a large amount of savings.

I looked at the stock market from 1978 - 1981, which is the last time we experience hyper inflation. In those 4 years the Dow went from 793 to 866 for an average one year gain of 2.3 percent, which is worse than average.

Next, let's assume one buys a house for $100k in cash.

Lastly, let's assume one buys a $100k property with a 20% down payment and an $80k loan. First, look at the value of the property:

Next let's take out the mortgage and see the equity in the property.

In absolute value the equity increased from 20k to 90k. After you adjust for inflation it increased from 20k to 45k.

Next, instead of looking at property values, let's look at the numbers from a rental/cashflow perspective.

So while taxes and rent go up the mortgage (as long as it's a fixed rate mortgage) should stay fixed. Another way of looking at this is that with inflation adjusted values rents and taxes are stable but your mortgage goes down.

In the example we had the value of a house going from 100k to 170k in actual dollars. I don't expect this to happen evenly during a period of hyper inflation. Instead based on what happened during the last period of hyper inflation, I would expect prices to stay even or rise slightly in the beginning. I would expect to see prices experience most of the increase as rates start to come down.

So why don't we wait until then to buy properties. The problem is that currently prices are low and rates are low. After inflation kicks in prices might still be low but rates will be higher.

So, moving beyond real estate, I think hyper inflation could have a pretty negative effect on a large segment of the population. Basically, a lot of people saving for retirement lost half of their life savings due to a falling stock market. Now their already lowered savings could be cut in half again through hyperinflation. Not a pretty picture. It also hurts people who live on fixed incomes as well as causing general instability in people's lives.

I am hoping to get some good comments on what other people think is going to happen. I would also like to hear some other investments that would be a good hedge against inflation.

Another one that might be good is putting money into bonds or CDs when rates hit their peak. In the first example we talked about how keeping money in cash during a period of high inflation might be a bad idea. But if you lock into long term bonds at the peak of inflation hopefully you could recieve a high rate of return even after inflation has subsided.

As always if you want to see what is currently on the market you can look here Austin Property Search. If you have any questions about the market or a particular house feel free to contact us.