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Thread: hyperinflation and prices of real estate

  1. #1

    Default hyperinflation and prices of real estate

    I am trying to determine what will happen to the prices of real estate when hyperinflation kicks in.

    Will home prices rise in relation to the value of the dollar ?

    My sense is that once interest rates start to rise, the other shoe (a big one) will drop and property values will decline (except maybe for farmland). It's after that which I am asking about. When they start to print massive amounts of money... will home prices (not values) go up in relation to dollar value?.. or will real estate take an even further hit as people scale down and move into smaller homes accross the country?

    Anyone from another country that has experienced this reading the board?



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  3. #2

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    In Argentina in 2000 or so when the currency/economy collapsed and hyperinflation was rampant, real estate markets collapsed. Land was (and still is) relatively cheap.
    I compiled a "brief" history of events since October 2008 that are defining the global currency war and the role that gold is playing:

    Tin Foil Hats, Economic Reality and the Total Perspective Vortex

    Also, have you contacted your Congressional Rep and asked them co-sponsor Ron Paul's Rep. Paul Broun Jr.'s HR 1098 77: Free Competition in Currencies Act?

  4. #3

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    So values kept going down and stayed down. That I understand.

    In simplistic terms what I am trying to understand is this: If there is a currency crises in the US, and a home is valued today at 100k, and that value remains the same throughtout the crisis but the dollar is devalued 4-1, will it take 400k to buy the same house?

    The value hasn't gone up just the # of dollars it's worth. Is that a correct thinking?

    If so, prices can rise even though values may fall if it is an asset not in demand.

  5. #4

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    No way to predict, but in Argentina, the prices actually fell (of course, their currency was also re-(de)-valued at some point).
    I compiled a "brief" history of events since October 2008 that are defining the global currency war and the role that gold is playing:

    Tin Foil Hats, Economic Reality and the Total Perspective Vortex

    Also, have you contacted your Congressional Rep and asked them co-sponsor Ron Paul's Rep. Paul Broun Jr.'s HR 1098 77: Free Competition in Currencies Act?

  6. #5

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    A lot of the things that require credit to buy will likely decrease in price. Most of the credit is going to go to government to keep their programs solvent, which will mean less credit going towards private industries.

  7. #6

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    Quote Originally Posted by mojobo View Post
    A lot of the things that require credit to buy will likely decrease in price. Most of the credit is going to go to government to keep their programs solvent, which will mean less credit going towards private industries.
    I'm not sure I understand what you mean. Are you saying there will be less money available on an overall basis and much will go to govt.? Would that mean that those who have money (or can get loans) can pretty much dictate what they want to pay - i.e. supply/demand?

  8. #7

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    When credit is harder for consumers to access, demand for things that normally require credit to buy - real estate, cars, boats, etc. - will fall. As demand falls, prices fall. It's another reason that Bernanke is trying so hard to keep down interest rates right now - to prop up asset (ie. real estate) prices.
    I compiled a "brief" history of events since October 2008 that are defining the global currency war and the role that gold is playing:

    Tin Foil Hats, Economic Reality and the Total Perspective Vortex

    Also, have you contacted your Congressional Rep and asked them co-sponsor Ron Paul's Rep. Paul Broun Jr.'s HR 1098 77: Free Competition in Currencies Act?

  9. #8

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    I understand supply/demand economics, and know that when rates start to rise that will drag down prices. Got that.

    So let's say rates go to 20%, and a house is valued at 100k then, and the govt wants to keep rates at 20% so it keeps printing more and more money until the dollar is devalued 4-1. Now it takes 4 dollars to buy what one dollar bought.

    Will that house now cost 400k? .. or will the fact that most people will no longer have that purchasing power keep the price at 100k? This is what I'm having a hard time with. The cost of lumber, materials and labor will escalate, so I can't see how prices could remain at 100k.

  10. #9

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    Real estate has generally tended to track inflation for the reasons you mention, lumber, tools, labor, etc, but it's hard to know what will happen if inflation is 20% instead of 2-3% annually. There's no sense to build more homes when they sell for less than their cost of replacement.

    I would suspect that home valuations would rise, but probably at a much greater time lag than other assets due mostly to the fact the market isn't all that liquid. But WTF do I know, this is pretty much uncharted territory.

  11. #10

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    I got this off a gold website which had a description of what happened during the weimar republic hyperinflationary period:

    Real Estate: Farmers and holders of urban property seemed to benefit if their property was mortgaged; the inflation soon wiped out the mortgage debt. However, they received no income, as noted above, since rents were frozen. After the stabilization, heavy new taxes and the urgent need for cash forced most holders to remortgage their property, often more heavily than originally, so that their gains were illusory. Still, those who held real estate throughout managed to save the capital thus invested. However, those who sold during the inflation (often through desperate need for cash) fared poorly. Because it brought no income, real estate sold at extremely low real price levels during inflation.

    According to this, real estate wasn't desireable as an investement and prices remained low. So it looks like there is a confluence of forces at play and real estate will actually decrease even more in value unless it has usefulness. I guess anyone sitting on a rental property thinking they can just jack up rents as the dollar devalues should think again...

    I'd love to hear more thoughts on this because it is important to just about everyone I know.

  12. #11
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    I suppose it would depend on if you own your property or not. As Jordan points out, the price of real estate tends to follow the rate of inflation over the long term. If you own your property and do not rent it out or resell it, inflation of real estate has no effect on you (unless property taxes are based on current selling prices in your area- some states do not change the apraised value of a home until it gets resold). Kind of like buying gold- once you own it, the only thing which matters is what you bought it at and what you sell it at- what it does in the meantime is meaningless to you.

    Suppose you are an owner and rent out your property. Again, you are facing fixed costs of ownership for the most part. Costs to repair and maintain the property will be going up, but that is a smaller portion of the total costs of the home so they will have some effect but a limited one on your costs so would you be more or less likely to raise the rent you charge? Based solely on the property costs, you would not need to raise the rent you charge by much if there was high inflation. You may want a higher profit though to pay for higher costs of things in your personal life though and that may have you increase the rent. In general, I would expect rents to rise but slower than the overall rate of inflation.

    What about buying a home? If prices of everything else is soaring, can people afford to also pay higher prices for buying a home? What about the cost of borrowing? What will happen to it? Interest rates have three components. One is the desired rate of return the lender seeks. Second is a risk factor for the borrower- riskier customers get charged higher rates. Third is the most important in a high inflation scenario- the expected rate of inflation during the time of the loan. Those locked in will be fine. Those wanting to take out new loans will be facing high rates for loans such as mortgages.

    The rate of inflation in 1980 was about 13.5% http://www.miseryindex.us/irbyyear.asp and interest rates were all high compared to what we see today. The Prime Rate was 15.26 and by January 1981 mortgage rates were over 18%. http://research.stlouisfed.org/fred2/data/MORTG.txt Higher costs of borrowing means that a person on the same income level can no longer afford the same priced house as they could before. We really didn't see much of a decline in the median price for a home in the early 1980's but we didn't see much of an increase either. That is perhaps becasue inflation did not stay at that level a long time and started to decline after 1980. Impact on prices would depend on how long the inflation lasted. In the short term, people who would like to sell a house and don't get the price they think they want for it will take it off the market and try to sell it again later (unless they had to move) and buyers would wait as well so we have both supply and demand shrinking and somewhat negating each other.

    median home prices: http://www.census.gov/const/uspricemon.pdf

    So if the inflation is short term (say a couple years), I would expect minimal impact on the price of housing. If it continues long term, then I would expect the prices of housing to go down in a very high inflation environment.
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  13. #12

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    Quote Originally Posted by cbc58 View Post
    I got this off a gold website which had a description of what happened during the weimar republic hyperinflationary period:

    Real Estate: Farmers and holders of urban property seemed to benefit if their property was mortgaged; the inflation soon wiped out the mortgage debt. However, they received no income, as noted above, since rents were frozen. After the stabilization, heavy new taxes and the urgent need for cash forced most holders to remortgage their property, often more heavily than originally, so that their gains were illusory. Still, those who held real estate throughout managed to save the capital thus invested. However, those who sold during the inflation (often through desperate need for cash) fared poorly. Because it brought no income, real estate sold at extremely low real price levels during inflation.

    According to this, real estate wasn't desireable as an investement and prices remained low. So it looks like there is a confluence of forces at play and real estate will actually decrease even more in value unless it has usefulness. I guess anyone sitting on a rental property thinking they can just jack up rents as the dollar devalues should think again...

    I'd love to hear more thoughts on this because it is important to just about everyone I know.
    Honestly, I've read that twice, and it sounds dumber every time.

    Basically, real estate was a bad investment because it got taxed after hyperinflation. Sounds more like a problem of taxation, not inflation.

    Why would real estate sell at extremely low real price levels during inflation, even if it doesn't generate income? Plenty of items that do not generate income, gold, for example, are said to do quite well during inflationary periods. Also, it says that "rents were frozen." If inflation was high enough to allow borrowers to pay off their homes quickly, why wouldn't it be high enough for people to pay higher rents? Were rents frozen by law? Or were rents "frozen" because they were contractual?

    Too many pieces missing from that story to make any real judgment.

  14. #13

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    i'm betting the last 2 posters have never owned real estate.

    If you own your property and do not rent it out or resell it, inflation of real estate has no effect on you (unless property taxes are based on current selling prices in your area- some states do not change the apraised value of a home until it gets resold).

    the only place i know of is california (i think) - where a proposition was enacted because of run away property taxes. that really doesn't count imho.

    there may be some confusion here on my question - hyperinflation vs. devaluation of the dollar. it's the devaluation of the dollar that I was trying to focus on - not the effect of high interest rates where the outcome is fairly obvious to see.

  15. #14
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    I own MOST of my property- it will be all paid off in the next couple of years as a matter of fact.

    I was attempting to show that the biggest effect on the real estate market would be seen via the impact the rate of inflation would have in interest rates. Higher rates of inflation means higher interest rates and in turn higher costs of borrowing so people cannot afford to borrowy to buy a home at the same price they could if rates were lower. The source of the inflation does not matter in the exercise.
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  16. #15

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    Quote Originally Posted by cbc58 View Post
    there may be some confusion here on my question - hyperinflation vs. devaluation of the dollar. it's the devaluation of the dollar that I was trying to focus on - not the effect of high interest rates where the outcome is fairly obvious to see.
    All I'm saying is that the example you provided said that "rents were frozen" which needs more context. Were they frozen by law, by contract, what? And how does extreme taxation necessarily follow hyperinflation?

    I don't understand why hyperinflation would provide income enough for someone to pay off the mortgage (non-rental income, since apparently rents were "frozen") but wages for tenants wouldn't rise enough to support higher rents? Tell me how that makes sense.

    Also, I'm failing to understand why real estate wouldn't be grouped with other, largely negative carry investments that tend to appreciate during periods of inflation.

    There are some errors in the logic of the historical example you posted. Whether or not I own real estate shouldn't matter, I do possess the ability to think critically, and something in that example isn't adding up.

    The author of that example basically says that hyperinflation allows landlords to pay off their loans, but rents do not increase. So, that means these loans aren't paid by rental income, but by other income. If other income for the landlord is rising, why aren't tenant incomes?

    You don't see a problem there?

    Also, in such a litigious society, it's a good idea to keep some kind of debt against property. Paid off homes are a lawyer's wet dream. (An LLC for each would help to divide assets, too.)
    Last edited by Jordan; 12-08-2010 at 09:14 PM.

  17. #16
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    One look at what happened in Argentina-
    http://www.allbusiness.com/real-esta.../288841-1.html
    Jumping to the summary:
    CONCLUSION

    * Real estate in superior locations maintained its value to a reasonable extent in the first two years following devaluation, enabling operators to reconsider and adapt their sales strategies.

    * The location of a property became the fundamental issue when purchasing decisions were made.

    * The scarcity of financing did not hinder the market as much as anticipated.

    * A substantial change in the profile of buyers occurred, from homeowners to non-resident investors.

    * Clients with no knowledge of the market too readily accepted as definitive values what was published in the press.

    * Values in the market became polarized more than ever.

    * If one measured the market in pesos (the Argentine currency) it generally went up and devaluation benefited the real estate market--if measured in foreign currency (assets in euros or dollars)--depreciated, but not in proportion to the Argentine currency devaluation.

    The Argentine experience of devaluation, in respect of situations such as the one underwent and its impact on the real estate sector, is quite rich in lessons. The varied responses exposed the weakness of simplistic analysis that does not consider the multiple factors at work in a crisis. Many issues are not related to the area of economics, but are more closely linked to cultural, sociological and subjective behavior.
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  18. #17

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    I would say it matters the extent of the hyper inflation. In Zimbabwe housing prices did not remain the same. I do not have any data, but I own a $100,000,000,000,000 Zimbabwe bill that I purchased for $1 on ebay. So the prices of everything rose in that market. If its "light" hyperinflation, I would think the expensive items which credit is needed for, would drop in price. But if the dollar really lost value in a hyper-inflationary way, then foreign investments would pour in and prop up prices unlike Argentina and especially Zimbabwe because for foreigners, prices would be near fire sale prices and everyone wants to be invested in America on the cheap. So its tricky. I think most believe prices in terms of stable foreign currencies and gold/silver would go down significantly.
    Last edited by cubical; 12-08-2010 at 11:32 PM.

  19. #18

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    Quote Originally Posted by Jordan View Post
    Honestly, I've read that twice, and it sounds dumber every time.

    Basically, real estate was a bad investment because it got taxed after hyperinflation. Sounds more like a problem of taxation, not inflation.

    Why would real estate sell at extremely low real price levels during inflation, even if it doesn't generate income? Plenty of items that do not generate income, gold, for example, are said to do quite well during inflationary periods. Also, it says that "rents were frozen." If inflation was high enough to allow borrowers to pay off their homes quickly, why wouldn't it be high enough for people to pay higher rents? Were rents frozen by law? Or were rents "frozen" because they were contractual?

    Too many pieces missing from that story to make any real judgment.
    The reason real estate prices fall during periods of high inflation is due to the nature in which most homes are purchased: through bank loans (mortgages). Most people can not afford the incredibly high interest payments, or even qualify for loans (as banks become incredibly stingy) in order to purchase a house. Therefore, demand for houses drops, and subsequently their prices. During hyper inflationary or highly inflationary times, many people are also losing their jobs. The most important thing on their minds is food and water, and many of them end up moving back in with parents or sharing accommodations, again reducing demand for housing.

    Regarding the frozen rents: most peoples wages do not rise with the inflation of prices (sticky wages). Ask yourself how often you get a raise at work - maybe twice a year if you're lucky, and it's usually only a pittance. Imagine prices are your local grocery store were rising 10-20% a year, a month, a DAY. You wouldn't be able to afford to pay higher rent - your main concern would be food. And this doesn't even address politicians and their constant, burning compulsion to 'do something' - which we all know would involve raising taxes and significantly hindering a landowners ability to manage their property the way they want.

  20. #19

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    Quote Originally Posted by TheOraclePaul View Post
    The reason real estate prices fall during periods of high inflation is due to the nature in which most homes are purchased: through bank loans (mortgages). Most people can not afford the incredibly high interest payments, or even qualify for loans (as banks become incredibly stingy) in order to purchase a house. Therefore, demand for houses drops, and subsequently their prices. During hyper inflationary or highly inflationary times, many people are also losing their jobs. The most important thing on their minds is food and water, and many of them end up moving back in with parents or sharing accommodations, again reducing demand for housing.

    Regarding the frozen rents: most peoples wages do not rise with the inflation of prices (sticky wages). Ask yourself how often you get a raise at work - maybe twice a year if you're lucky, and it's usually only a pittance. Imagine prices are your local grocery store were rising 10-20% a year, a month, a DAY. You wouldn't be able to afford to pay higher rent - your main concern would be food. And this doesn't even address politicians and their constant, burning compulsion to 'do something' - which we all know would involve raising taxes and significantly hindering a landowners ability to manage their property the way they want.
    You totally missed the point. I'll explain one last time:

    The author cbc quoted said that hyperinflation allowed people to pay off their mortgages, but that rents were frozen.

    Ok. So let's think about that. Rents are frozen, meaning they aren't going anywhere, but hyperinflation (decrease in currency values) allows landlords to pay off their property quickly.

    If rents are frozen, clearly, landlords aren't paying off homes from rental income. So what income are they using to pay off their rental homes? Obviously this income is rising during this period of hyperinflation, since landlords are paying off their houses sooooo much quicker post-inflation.

    We could assume they're earning an income elsewhere, in which case tenant incomes should be rising, at least to some degree. Or we could make the assumption that they're selling other assets that are rising in terms of currency to pay off their property, in which case you'd expect that tenants would sell assets to afford their rent, as well.

    The logic in the quoted text isn't there. If incomes are rising sufficiently for leveraged real estate investors to pay off homes, why aren't they rising for tenants?

    I don't know why I'm even arguing this any more. A quick Google search reveals the quote was taken from a sketchy looking gold dealer website with zero sources. I guess it doesn't have to make sense if it moves product.
    Last edited by Jordan; 12-09-2010 at 12:02 AM.

  21. #20

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    During periods of *inflation*, incomes rise somewhat proportional to interest rates and it allows people to pay back mortgages "cheaply" (not necessarily faster).

    During persiods of *hyperinflation*, costs of living far outstrip incomes and it is difficult for people to pay off debts. This is when the rich get richer as they "buy when there is blood in the streets".
    I compiled a "brief" history of events since October 2008 that are defining the global currency war and the role that gold is playing:

    Tin Foil Hats, Economic Reality and the Total Perspective Vortex

    Also, have you contacted your Congressional Rep and asked them co-sponsor Ron Paul's Rep. Paul Broun Jr.'s HR 1098 77: Free Competition in Currencies Act?

  22. #21

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    Quote Originally Posted by Jordan View Post
    You totally missed the point. I'll explain one last time:

    The author cbc quoted said that hyperinflation allowed people to pay off their mortgages, but that rents were frozen.

    Ok. So let's think about that. Rents are frozen, meaning they aren't going anywhere, but hyperinflation (decrease in currency values) allows landlords to pay off their property quickly.

    If rents are frozen, clearly, landlords aren't paying off homes from rental income. So what income are they using to pay off their rental homes? Obviously this income is rising during this period of hyperinflation, since landlords are paying off their houses sooooo much quicker post-inflation.

    We could assume they're earning an income elsewhere, in which case tenant incomes should be rising, at least to some degree. Or we could make the assumption that they're selling other assets that are rising in terms of currency to pay off their property, in which case you'd expect that tenants would sell assets to afford their rent, as well.

    The logic in the quoted text isn't there. If incomes are rising sufficiently for leveraged real estate investors to pay off homes, why aren't they rising for tenants?

    I don't know why I'm even arguing this any more. A quick Google search reveals the quote was taken from a sketchy looking gold dealer website with zero sources. I guess it doesn't have to make sense if it moves product.
    I get what you're saying.

    One thing I can think of is that as the currency hyper inflates, gold and silver skyrocket. If you had the forsight to purchase silver/gold when they were affordable (and bought a substancial amount), one could sell SOME gold/silver for a whole lot of paper and then use that paper to pay off the mortgage and still have some gold/silver left over to use as trade for food.

    Ditto for many commodities.
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  23. #22

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    Quote Originally Posted by Jordan View Post
    You totally missed the point. I'll explain one last time:

    The author cbc quoted said that hyperinflation allowed people to pay off their mortgages, but that rents were frozen.

    Ok. So let's think about that. Rents are frozen, meaning they aren't going anywhere, but hyperinflation (decrease in currency values) allows landlords to pay off their property quickly.

    If rents are frozen, clearly, landlords aren't paying off homes from rental income. So what income are they using to pay off their rental homes? Obviously this income is rising during this period of hyperinflation, since landlords are paying off their houses sooooo much quicker post-inflation.

    We could assume they're earning an income elsewhere, in which case tenant incomes should be rising, at least to some degree. Or we could make the assumption that they're selling other assets that are rising in terms of currency to pay off their property, in which case you'd expect that tenants would sell assets to afford their rent, as well.

    The logic in the quoted text isn't there. If incomes are rising sufficiently for leveraged real estate investors to pay off homes, why aren't they rising for tenants?

    I don't know why I'm even arguing this any more. A quick Google search reveals the quote was taken from a sketchy looking gold dealer website with zero sources. I guess it doesn't have to make sense if it moves product.
    I'm sort of confused by your sudden animosity towards my post. If you read my post in its entirety, you would see that we are both in agreement. Also, I don't appreciate you saying I took this quote off a gold dealer website - I wrote it entirely by myself. I happen to understand economics quite well and just threw it together on the spot.

    We are in agreement that you can't pay off your mortgage in a hyperinflationary scenario unless you have some form of income that is rising to meet the increase in payments. If rents are fixed, you can't meet the increases. If your salary isn't rising, again you can't meet the increases. If you have a store of some asset or own property (example: a farm, a mine, etc.) that is keeping pace with inflation, then you will have an easier time paying off the mortgage. Also, if the mortgage was 'fixed-rate', then you should have an easy time paying off the mortgage, because by the time rent controls are put in place, inflation would have eaten away quite a bit of what you owed on the house.

  24. #23

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    Quote Originally Posted by TheOraclePaul View Post
    We are in agreement that you can't pay off your mortgage in a hyperinflationary scenario unless you have some form of income that is rising to meet the increase in payments. If rents are fixed, you can't meet the increases. If your salary isn't rising, again you can't meet the increases. If you have a store of some asset or own property (example: a farm, a mine, etc.) that is keeping pace with inflation, then you will have an easier time paying off the mortgage. Also, if the mortgage was 'fixed-rate', then you should have an easy time paying off the mortgage, because by the time rent controls are put in place, inflation would have eaten away quite a bit of what you owed on the house.
    I meant that Cbc's cut and paste job was from a gold dealer, not yours, my apologies. That was what I was mostly replying to.

    On second look, yeah, mostly in agreement. Maybe I shouldn't come here past midnight as I tend to get a little grumpy.

  25. #24

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    Quote Originally Posted by cbc58 View Post
    So values kept going down and stayed down. That I understand.

    In simplistic terms what I am trying to understand is this: If there is a currency crises in the US, and a home is valued today at 100k, and that value remains the same throughtout the crisis but the dollar is devalued 4-1, will it take 400k to buy the same house?

    The value hasn't gone up just the # of dollars it's worth. Is that a correct thinking?

    If so, prices can rise even though values may fall if it is an asset not in demand.
    Cost of home = personal income/ (taxes + principal + interest)

    To own a home, one has to weight ones personal income vs the taxes, principal and interest the home costs. If the economy goes south, and even severe (not hyper) double digit inflation hits, with increase taxes (as states require more money) as unemployment creeps up, yeah, the principal (value of the home) will need to go done in order to attract buyers (market). i.e. pi goes down, taxes go up interest goes up, only thing that is variable is what sellers (unemployed ) will sell their homes for, which must go down.
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  26. #25

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    Meh, throw it in your "non-inflation hedged" portfolio allotment and call it done. Real estate, IMO, is still one of the best ways to grow wealth.

    Off Topic: This forum needs a real estate subforum for discussion of specific real estate investing, deal structuring and income tax strategy. A whole book could be written on structuring a real estate deal as an LLP with a 1% shell GP, 99% LP and the benefits of pass through earnings for avoding FICA taxes. But due to the way this forum is set up (too much activity, too much OH SHIT SKY IS FALLING!), topics like that will just get ignored.

  27. #26

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    Quote Originally Posted by Jordan View Post
    Meh, throw it in your "non-inflation hedged" portfolio allotment and call it done. Real estate, IMO, is still one of the best ways to grow wealth.

    Off Topic: This forum needs a real estate subforum for discussion of specific real estate investing, deal structuring and income tax strategy. A whole book could be written on structuring a real estate deal as an LLP with a 1% shell GP, 99% LP and the benefits of pass through earnings for avoding FICA taxes. But due to the way this forum is set up (too much activity, too much OH SHIT SKY IS FALLING!), topics like that will just get ignored.
    I concur. There should be a real estate forum.
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