June 4th, 2009 | 
Author: I have a suggestion for how you can benefit in residential real estate from the approaching inflation.
When writing about inflation, most personal finance writers (including Mr. ToughMoneyLove) spend most of their energy on damage control. We talk about investing in gold, commodities in general, or inflation protected securities such as I-Bonds and TIPS. There is a lot more of that going on now because of current government fiscal and monetary policies. Most experts just can’t see a way for our economy to avoid the ravages of escalating inflation in the very near future.
The news this week suggests that experts in the real estate financing business are already seeing signs of inflationary pressure. More specifically, long term interest rates took a big upward jump. This includes mortgage interest rates. Lenders are not going to lock themselves into a low interest rate for 15 or 30 years while rates at which they borrow are skyrocketing around them. They are now anticipating exactly that and are adjusting rates accordingly.
You can take advantage of what’s about to happen. But it may not be easy.
You need to prepare to exploit a further drop in residential home prices.
Yes I know that home values have plummeted in the past two years. But they are likely to fall even more if, as expected, mortgage interest rates start climbing.
Historically, home prices generally have had an inverse relationship to mortgage interest rates. As rates rise, prices fall. This is only logical. A buyer looking to borrow money to buy a house is constrained by the size of the monthly payment as it relates to their income. At least, that is the way the financially responsible people approached things. Higher interest rates increase the size of the monthly mortgage payment, thereby decreasing the size of the mortgage – and value of the house – that a buyer can afford. High interest rates can price some buyers out of the market entirely. Other buyers may choose to wait things out, hoping for a decline in rates.
The result? Falling demand and therefore a decline in prices for both new and resale homes.
This was precisely the theory that the Treasury was counting on when it began spending a lot of our money to force mortgage interest rates down. Its goal was to boost home values to help owners recover from being underwater on their mortgage balances. The rates went down for sure. Lots of new buyers are getting some financing bargains.
But time may have run out on artificially low mortgage interest rates.
So how do you prepare to exploit what is going to happen?
Many of you won’t like this idea but here it is: Pay cash for your next home.
If I am right about home prices falling even more when interest rates go up, there will be untold home bargains to be found, even better than today. Naturally, you don’t want to pay for that bargain with a high mortgage interest rate. Paying with cash is the best way to capture the benefit from inflation.
Where do you get the cash? The best way is to save it. With enormous government deficits built into the budget for the next ten years, inflation will be with us for a while. This gives you several years at least to stash money so that you can snatch a real estate bargain when the time is right.
What if you already own a home? Think about selling it now, before prices drop again. Rent, invest your equity, and get ready for your next move into the housing market. This may not make sense for a young family planning to stay put. But if you are a baby boomer thinking about downsizing, this plan can make sense. Even if you are younger and you know you will be moving in a few years anyway, why not implement a plan now to benefit?
I didn’t say it would be easy. But sometimes you need to work hard to take advantage of a golden opportunity. An inflationary economy may present you with just such an opportunity, for your next home.
So readers, what do you think of my suggestion?
This is an article from Tough Money Love
Copyright 2009 Tough Money Love. All Rights Reserved
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