Okay, don’t laugh at me, I am not one of those Realtors who says buy, buy buy!! I want to give you a few really good reasons why purchasing a home in today’s declining real estate markets makes long term financial sense.
How Much Money Do You Have Sitting In Investment Accounts?
If you’re like most people who still have money, you have it invested into money market accounts, CD’s, or the stock market. Knowing that we’re in a recession, the stock market is risky business as it’s up’s and down’s are drastically changing everyday.
Money market and Certificate of deposit’s (CD) accounts are showing pretty terrible returns lately. Last I checked, most MMA’s are showing between a 1.3% and 3% return on your money. CD’s are around the same numbers unless you have a mature account.
These lowered interest rates are all signs of deflation, and yet the government continues to print money out of thin air creating looming monetary inflation. Asset price deflation is competing with monetary inflation. Did I lose you? Trust me, you are not alone, as I had to do quite a bit of studying to understand these terms myself.
What does this have to do with purchasing real estate?
We can all see the effects of asset deflation. Prices are going down, investment return rates are decreasing, and it’s becoming harder to find investments that are returning more than inflation. (Current inflation rate is 2.6%)
Think about this. The fed has been pumping money into the economy without reserve. They are trying to fend off the deflation we are experiencing, and it’s having little effect as prices continue to decline. What they have done is fend off the rate of dropping prices. Prices are dropping but at slower rates due to an infusion of inflation, or more money.
Many economist’s still believe home prices are going to decline until they hit 1999 levels. The fed doesn’t want this to happen. Which is why interest rates are still reaching all time lows, they’re bailing out to big to fail companies, and artificially propping up the stock market through money infusions.
Were experiencing inflation during a deflationary period. When inflation is on the rise, which it will become worse over the next couple years, it’s best to own hard assets. Housing is a hard asset the same as gold.
Owning Hard Assets Is the Key To Thwarting Inflation
Hard asset’s are the best investments during an inflationary period. Owning gold is one of the those investments, but be careful. Gold has been rising quite dramatically lately, and what goes up must come down. Are you ready for the gold bubble to burst?
Housing had it’s bubble burst in 2008. It’s on the way down to normal, however long that down may be, but it won’t be as long as other assets which are still peaking such as gold. As inflation starts to rear it’s ugly head, which there are already signs of it happening, one must restructure their investments.
Owning money in bill form is financial suicide during a hyper inflationary period. Owning hard assets is the key to ride out inflation and housing has shown to be one of the best investments during an extreme inflationary period.
Learn From History
During the great depression from 1929-1933, the US saw the largest deflationary period in the 1900′s. From March of 1933 to May of 1933, the US went from deflation to inflation practically overnight. How did this happen? The government decided to change the rules.
What happened was, we went from the Gold standard which showed ups and downs all the time. Including periods of deep deflation during 1839-1843 and 1869-1896 which were each much larger than the depression of the 1930′s. These depressions were based on the gold standard and not the dollar standard.
(Graph From: Inflation During The Great Depression)
The government, back in March of 1933 changed the way our economy works. They went from the gold standard, which is incredibly hard to thwart deflation, to the dollar standard; which can control deflation by change of government policy. This is exactly what is happening right now and started in 2008.
What the great depression showed us is, if you have a tangible asset currency such as gold or silver, it’s much harder to control a deflationary period. That all changed in 1933, and the fed is doing the same thing today. They are changing the rules to keep deflation from taking over and they are inducing inflation by pumping trillions of dollars into our economy.
Inflation is already here and it will, over the next couple of years, be the driving force to stopping our recession. Ben Bernanke knows this, he has studied the great depression rigorously, to the point he laughs at fears of deflation. He knows that in order to stop deflation in the “dollar” standard, we must counteract it with inflation. Which is why you should purchase a home in a declining market for long term investment safety.
Source: Gold Eagle Inflation During The Great Depression
Owning An Asset, Even When It’s Deflating, Can Be Protective During An Inflationary Period
If we look at real world examples of what a deflationary period with an inflating currency does to real world people, you and me. We can see that you can use monetary inflation to protect your money during a deflationary period. (It’s happening in Iceland today, it happened in Russia, Germany, and Argentina.)
Let’s say inflation averages 10% a year. If we bought a house that cost $100,000 that deflates at 8% a year, you essentially have protected yourself from that loss in monetary value. Sound complicated? It is, but isn’t.
If you buy an asset that deflates at a lower rate than the inflation of the dollar you paid for that asset, you are not only protecting your net worth, but increasing it. If you leave your money in retirement accounts, money market accounts, or CD accounts. Monetary inflation will destroy your net worth. Your buying power will significantly decrease as the value of the dollar goes to the crapper.
When Germany, Russia, and Argentina faced deflation during monetary inflation, the hardest hit were those who were uneducated. The retirees who left their money in bonds, money market, and pension investments saw their financial wealth destroyed. Those that redistributed their wealth to use monetary inflation against deflation, saw great returns and changed their financial status for the better.
Despite declining housing prices, it’s still smart to purchase a home. Investing in housing will protect your wealth from the very real fact that government is destroying the value of our money as we know it.
They are changing the rules, and until we know how those rules will effect us in the future, we should use the lessons of history to protect our futures. Don’t buy a home because a real estate agents says it’s a good time to buy. Buy because the past shows the future, and the future is in assets not money.
This is a tough question to answer. Investors have made money flipping real estate during any market, but with today’s swollen inventory levels, it’s becoming a whole lot harder.
