Saturday, May 1, 2010

Buying a Home, Before or After Inflation - and with what currency?‏

Have been reading your blogs for a couple years now - great stuff!
If you were able to go back before inflation times, and you had enough 
cash to buy a nice home in a nice area, what would you do? 
A) Purchase the home with the cash, before inflation
B) Purchase the home with the cash, after the inflation 
C) Buy gold/another currency with your cash before the inflation.
Then when inflation hits, buy the home with the value of gold/another currency?
I understand that timing is difficult, if not impossible in an economic scenario. 
Though I am very interested in seeing how things turned out there in Argentina 
during those times.
Take care out there!

Hi Jason, keep in mind the following: The currency here is the pesos. Say you had 100.000 pesos cash. After the collapse you have that same paper money but now the cost is 100.000 USD… with a dollar costing 4 pesos. So you only have 25% of that same house, just because you waited a week too long.

Always talking very unlikely theory here, but if the USA economy collapses the same thing could happen with real estate. You guys wont end up buying houses in Euros, but all of a sudden when people feel that the dollar isn’t worth as much any more, prices will multiply themselves as the dollar looses value. If there’s a collapse, followed by a bank run, this could happen within days.

If you have enough savings and you want to make yourself such as “safety net”, gold sure is your best bet.
Now, if you have the money and you don’t have a house, then I’d get a home given today’s prices. If you shop around you’re likely to find good offers that will hardly get any better. As of right now, a good house in USA costs the same as a good house in Argentina, and its not that Argentine prices are over inflated, its that US home prices are unusually cheap. Inflated property prices? Take a look at Europe. You can’t buy a 2 bedroom condo near to Barcelona for the same price you’d get a very nice 3 bedroom house in a lice location in most US States.



dc.sunsets said...

Mr. Aguirre,
Just because Spain's real estate prices are OOC (out of control) does not mean U.S. prices are a bargain. Spain (and Canada and Australia among many others) is in an unsustainable condition:

The world has floated higher on the vapors of fiat money, fueling asset price bubbles based on credit availability.

What happens when the credit availability evaporates and people must pay most or all for a purchase in CASH? What happens to prices when bank credit is hard to get or non-existent?

Prices crater. That's in pesos, in francs, in yen, or in dollars, whatever the local flavor might be. Those who are expecting, in the early stages of this economic re-set, to see INflation are guilty of fighting the last war. We HAD inflation...credit inflation, and have the overhanging debt to show for it. The repudiation of that debt is deeply deflationary, and that's the path that appears most likely. Europe is headed for a sovereign debt collapse and the U.S. will eventually follow in some years.

dc.sunsets said...

Buying a home today is a bet that inflation is the only path ahead.

The last two BIG U.S. depressions (1835-1842 and 1930-1946) saw home prices collapse a full 90% according to available data. They were preceded by huge buildups in bank credit and thus debt, just like the run-up to this blooming bust. The only reason homes are affordable at all at current prices is because of the insane availability of 30 year mortgages at low interest rates. Would YOU hand $150,000 of YOUR money to some clown who will pay you ON CONTRACT a measly 6% yield for the next three decades, and if his house collapses in value he just mails you the keys and says "screw you?"

I sure wouldn't, and people in the banking industry are beginning to see things similarly.

The U.S. banking system is technically insolvent. As that is revealed in full (it takes time for people to adjust and accept it) then bank credit will evaporate entirely, taking prices toward the basement.

Anonymous said...

I don't understand this, "Those who are expecting, in the early stages of this economic re-set, to see INflation are guilty of fighting the last war. We HAD inflation..."

Other than housing and cars, life's been pretty cheap the last twenty years, especially food.

A Hyper-Inflationary Great Depression is Coming
Sunday, May 2, 2010

what you’ll find is that the annual operating shortfall is running between $4 and $5 trillion; not $500 billion as we saw before the crisis or the $1.4 trillion that they announced for fiscal 2009.

With no political will to contain the spending, eventually the government meets its obligations by revving up the currency printing press.


Anonymous said...

Homes in the U.S. recently were Not affordable (they still aren't) when using a price to income ratio, that's why the housing bubble burst, the price to income ratio got out of wack and rising house prices could no longer be sustained no matter how easy the terms of the loans.

dc.sunsets said...

@anon re: Karen DeCoster.

DeCoster appears to confuse "revving up the printing presses" with floating more gov't debt. They are NOT synonymous.

Since 1913 (when the Fed was created) the dollar has lost 95% of its purchasing power. That's inflation.

Today we have an ocean of IOUs that people THINK is wealth. Those IOUs include gov't debt, but it's of value only so long as people trust it will be honored (it won't be). Those who expect hyperinflation have yet to point to a SINGLE instance in history when hyperinflation was effected via credit creation (which is what we continue to experience). It has NEVER happened. All hyperinflations are currency (printing) phenomena.

I can't ask this enough: How do you think anyone can PRINT enough cash to hyperinflate the U.S. economy as it stands? There aren't enough trees to turn into paper. Until you can show me a $1,000 bill (much less a $100,000 bill...I think Obama's image will grace it), there is no chance for hyperinflation.

For a ton more on this subject go here: http://www.elliottwave.com/deflation-survival-guide.aspx

Anonymous said...

"...Keep in mind that all this is progressing despite a strong dollar. Of course that is just an illusion. It really isn't possible to print trillions of dollars out of thin air and have a strong currency. The dollar just appears strong because the currencies it's measured against are exceptionally weak right now. The relentless rise in most commodity prices reveals the truth about the dollar’s value.

We are now on the verge of a surge (maybe a huge spike) in inflation."


dc.sunsets said...

@anon regarding someone claiming there's a "relentless rise in commodity prices."

Why do people BELIEVE this idiocy when the truth is easily discovered? It took me 4 minutes to figure out the right symbol to use at Bigcharts to look at 10 years of commodity prices. Who needs glasses? My eyes tell me that the trend toward rising commodity prices ended two years ago in the greatest collapse in prices EVER. Is that inflation?

Where do these people dream this up? Why do others believe it?