Real Estate

Inflation will save you

By Johnny Fuery ⋅ February 19, 2007 ⋅  Print This Post ⋅ Post a comment

One statement I’ve found myself saying pretty regularly over the past six months or so is “even if nothing else changes, inflation will save you.”

This is generally in response to people who have purchased real estate anytime in the last two years. I even found myself repeating it to my mom when I saw her just last night. She was concerned about the price of her condo because she’s seeing a lot of units in her building remain on the market, unsold, for a much longer time than usual. “A couple of years ago, they were selling like hotcakes.”

Now, if you happen to be a real estate investor (or an aspiring one), the only challenge to stay focused on is holding on. Don’t get into a negative cash flow situation that requires you to sell. Do have savings set aside so that you don’t have to sell in an emergency. The worst possible time to sell? Right after a bubble deflates. (That would be now, boys and girls.)

The only time to sell is when you’re getting ready to retire (and yes, I’m selling a house right now. Anyone interested in a nice duplex in Oakland? It’s beautiful!). Even if you bought in Summer 2005, inflation will save you.

You know how your parents bought a house in, oh, the late 70s, and paid 10% interest (fixed) on a house that sold for $65K? Then they sat on a $600 mortgage for the next 10 years, and the relative hyperinflation of the late 70s and early 80s “saved” them and their income had quintupled even though they made less in buying power terms every year?

Sorry. I know I’m slipping in jargon and a fair amount of history, here. But the point is, you do recall your parents paying seemingly nothing in monthly mortgage payments and owing little more than they made in a year, right?

This, my friends, is the beauty of inflation. Get into a fixed rate mortgage, ride the ups and downs of the market, and pay off your house in inflated dollars. This is why banks love adjustable rates so much — because, assuming you have a mature capital market, interest rates are always higher than inflation (they have to be — if they weren’t, there is no incentive to invest at all, ever), which means an adjustable rate mortgage (ARM) has the bank’s profits built-in.

Inflation is a terrible cancer on wealth when you’re a saver. But when you’re using leverage, i.e., debt, as a tool to create wealth, it hides mistakes. That house you bought for $600K last summer will be worth a million someday. I guarantee it. And kids at Starbucks will make as much as I did in my first salaried position as a network administrator. But you’ll still owe only $500 and change.

Keywords: investing, real estate, leverage, real estate investing, real_estate, inflation, good debt, mortgage