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:
- Shadow inventory will knock down real estate prices
- 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?