Inflation + Deflation = Cheap Real Estate

Inflation + Deflation = Cheap Real Estate

One thing that I don't see mentioned in the media when factoring in value investing in Real Estate is combination of inflation in the dollar and deflation of the real estate market.

A little background first. The CPI is a artificially manipulated inflation figure that doesn't count two important staples which would show true the inflation figure and scare the pants off of people, food and gas. CPI would have you believe inflation is running below 5%, while true CPI is running upwards of 12%. M3 (a best measure of money supply, and important number scratched by the Fed, but still tracked by others) paints a picture to support this as well.

The housing market on the other hand is experiencing deflation. Now approaching close to -30% off peak.

When factoring in value, and how much lower can you go, it is not just based on discount of the property in shear terms of price, but also price properly weighted against the dollar.

Just for an example, not as a actual investment equation, let's say there was a house in 2006 selling for $500,000. To buy it with today's cheaper dollars back then, it would cost you around $590,000. That same $500,000 house is selling for $350,000 today. So you actually got much better than a 30% discount from those peak prices, you got a 41% discount in real value. But we don't like to pay asking price, so let's say we picked that house up at $300,000. Now we're talking about a 50% discount off the peak prices.

Let's assume the Fed is going to take inflation serious again once they get a grip on the financial and credit markets, and they get inflation under control, the dollar strengthens. When it does, you'll be spending more expensive dollars, but right now, you are spending cheaper ones.

This should be taken into consideration when determining how much of a deal you are getting, and where market support can be gathered. Some have said support will not form until mid 1990's prices are reached. Factoring true inflation and we're there in some markets. The caveat is that personal income is not keeping pace with true CPI, which in turn will effect a portion the demand side.

The morale of the story is right now property is property prices are at a big discount from a couple years ago, the value of the dollar is down considerably as well. So, not only are you spending less on the price, you are spending less buying power also.

I've always believed if you have a asset with a track record of appreciation over the long term, it doesn't matter which way the market is moving if you get it cheap enough. Look for the deal of deals. Quality, not quantity.


rebucks wrote:The CPI is a

rebucks wrote:
The CPI is a artificially manipulated inflation figure that doesn't count two important staples which would show true the inflation figure and scare the pants off of people, food and gas.

This is VERY true and does not get nearly the pub that it should.

I believe the govt would have us all believe that inflation is actually running less than THREE percent.

Nonsense, as anyone who actually goes inside a grocery store can tell you.

(My local paper ran a story not too long ago about the year over year price increases in a number of food items. The lowest number was 9.9% and eggs were up over 19%.)

great point

Great point Mark. Something I would like to add that is hidden within what Mark said...If you own real estate right now and the market starts to turn around and correct itself like it is doing with the foreclosures, eventually supply and demand gets flip flopped and demand goes into overdrive and the dollar continues to fall (which it will) the price of the real estate you own today will sky rocket! New housing starts have shut off. (the reason I am buying as much cash flowing real estate as possible). If inflation (the dollar losing value) continues to run upto 30% or higher (totally possible-look at gas prices and corn prices) the price of your real estate just went up 30%. Tangible (real permanent items) will appreciate quickly. This will be something that happens fast. If you are prepared you will be rewarded. This is the recipe for great wealth quickly. There were a few very wealthy people created during the depression. They were the ones that understood how to buy real estate. This is a topic I am studying very heavily right now because of its importance. I recently had the opportunity to meet with one of the top bank OWNERS in the country. He went through this with me one-on-one. Now add into the mix the largest group of people in the country (the baby boomers 77 million strong) are getting ready to retire....and move! Followed by the second largest group of people in the country (the echo boomers) who are the baby boomers kids, are wanting to buy a home and move out...where will they move and what will they buy? See if you can figure it out. The U.S. population is predicted to explode once again and grow an additional 25% in the next 20 years! Lots of millionaires will be created, will you be one of them? People should react to this with a sense of urgency. The decisions you make in the next 2-5 years could impact your lives forever. Don't miss out! Thanks for the awesome topic.


You've got to find your obstacles and call them out! Unsheath the sword, and do battle with whatever it is that holds you back!


those last 2 post from $$bucks$$ and cbr, got me so ready to get going already, i'm starting to grow impatient, this is god awfull ( the waiting ), tommorrow i'm going to my county courthouse finally to get me a pre-foreclosure list put together and then i can get some advertising in place, and i should be good to go...YOUR HERO,SULLY.