Real Estate is the Best Anti-Inflation Play

[Jordan]

In numerous threads I've encountered a view that real estate is a loser when rates invariably rise from inflation. I want to challenge this position, hopefully keeping within the confines of what makes a good debate according to Steven Douglas.

The bear case is this:

1. Shadow inventory will knock down real estate prices
2. Rising rates will ultimately drive down the amount people are willing to pay for a home

I submit that these are nonfactors in real estate investing. First, shadow inventory is not evenly distributed across the United States so much of it is in markets where no investor would put his or her dollars. Secondly, rising rates from inflation will not drive down the price of a home.

Real estate vs. Gold

Real estate, much like gold, is safe in that you cannot make more of it. Should interest rates rise due to an increase in the level of inflation, then the cost to build a new home would also increase. Thus, the intrinsic value of a piece of cash flowing real estate with a locked-in interest rate for 30 years should also rise.

Homes sell for less than their cost of replacement in many markets, meaning they sell for less than their intrinsic value. If inflation goes up, so do interest rates. If you stop here, you would think that people would pay less for a home because they cannot afford a $200,000 home at 10% if they barely qualify for a $200,000 home at 3%.

However, if we're led to believe that rising rates are from inflation, then wouldn't it also be true that the cost to build a home would also increase? Of course. Which means that real estate is a good anti-inflation play that actually generates cash flow - unlike gold - and like gold, you cannot make more real estate out of thin air.

So tell me, the superinvestors of RPF, why is real estate a poor anti-inflation play? Hasn't real estate historically been one of the best anti-inflation plays? And if so, why is it not a good play today?

[oyarde]

I have land ,timber , tillable, silver , copper, gold, water , food , weapons, ammo .I have all the bases covered.I imagine SD does too.

[oyarde]

On the other hand, rental properties kind of suck. Been there , done that ....

[tod evans]

Damn, and here I was getting all excited about liquidating all the stuff I can hold in my hand and making some big money.....

Guess maybe I ought to keep on keepin' on...

[CaptUSA]

The only problem with real estate is that the bubble never really deflated. Having interest rates so low for so long allowed people to borrow more which drove up the cost. A lot of real estate is over-valued right now.

It's still a solid asset, though. And you can still find good buys.

Bottom line, if you have real estate already, keep it. If you still owe, refinance while rates are low. If you're looking to buy, you can get good deals (especially at low rates), but you may have to hold it for a long time before you can get your money back. When the value of the dollar shrinks and interest rates start to rise, it will be harder for people to get the money to buy your land.

So to me, it's not an inflation issue, it's the bubble issue.

[Jordan]

The only problem with real estate is that the bubble never really deflated. Having interest rates so low for so long allowed people to borrow more which drove up the cost. A lot of real estate is over-valued right now.

It's still a solid asset, though. And you can still find good buys.

Bottom line, if you have real estate already, keep it. If you still owe, refinance while rates are low. If you're looking to buy, you can get good deals (especially at low rates), but you may have to hold it for a long time before you can get your money back. When the value of the dollar shrinks and interest rates start to rise, it will be harder for people to get the money to buy your land.

So to me, it's not an inflation issue, it's the bubble issue.

First, CaptUSA, thanks for bringing forth something worthy of discussion.

Of course, all real estate is local. I want to focus on the bubble issue, because I think the bubble is long gone. Here's the thing: I can look in my newspaper right now and find 20-50 high-quality houses that are selling for less than their cost of replacement by 20% or more. That is, if I wanted to duplicate a $100,000 home on the market, I would have to spend $120,000+ to do so.

No one can make any money building new homes in my market. It costs more to build a home than to buy one that already exists. It's fundamentally irrational to build a home where I live at the present time. Homebuilders don't make money building homes for $120,000 and selling them for $100,000.

So, with that said, I fail to see how the market is in bubble territory still. If a home is selling for less than what it would cost to make a new one, then it is hardly overvalued. Seeing as prices to construct a new home go up over time, then real estate makes a good investment.

[bxm042]

When the value of the dollar shrinks and interest rates start to rise, it will be harder for people to get the money to buy your land.

It would also drive up the price of rent. Duplex/triplex/quad ftw.

[Tpoints]

First, CaptUSA, thanks for bringing forth something worthy of discussion.

Of course, all real estate is local. I want to focus on the bubble issue, because I think the bubble is long gone.

By bubble gone, you mean the height is gone, but not that it's bursted already, right? Because if you don't believe hyperinflation is coming, you MUST believe houses will depreciate, right?

[LibForestPaul]

Real estate is horrible to lease, since it can not be owned, it should not be bought for anything other than utilitarian needs (some place to live). The only difference from renting is that you are locked into a particular location. The hell I want to lease a piece of land, pay taxes on it for perpetuity, pay taxes on faux capital gains (2013+), and not be able to hide it on black market. Gold boys, gold and silver. Income producing holdings, utilities, own home business, the grayer the better.

[cubical]

Home purchases are, for the most part, a purchase with credit. As the cost of credit rises, less people will be able to borrow, it is as simply as that.

Even with rates at historic lows the housing market is sitting on the lows of the last 10 years. Just because something costs less than to replace, doesn't mean it is undervalued. It means there is excess supply.

When we hit hyperinflation, houses may go up or down in price, it matters how bad it is, but they will almost certainly approach their "cash value" price.