Inflation ~ Real Estate The Answer?

 Inflation ~ Real Estate The Answer?

Inflation calculator <==Use the inflation calculator link to see how much prices have changed in the United States from 1913 to July 17, 2012.  Next update will be 8/15/12 Inflation is a sustained increase in the general level of prices for goods and services. It is an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service. Read more: Inflation ~ Real Estate The Answer? Causes of Inflation Economists wake up in the morning hoping for a chance to debate the causes of inflation. There is no one cause that’s universally agreed upon, but at least two theories are generally accepted: Demand-Pull Inflation – The theory summarized as “too much money chasing too few goods”. In other words, if demand is growing faster than supply, prices will increase. This usually occurs in growing economies. Cost-Push Inflation – When companies’ costs go up, they need to increase prices to keep up their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports.

Inflation ~ Real Estate The Answer? Costs of Inflation

Almost everyone thinks inflation is evil, but it isn’t necessarily so. Inflation affects different people in different ways. It also depends on whether inflation being anticipated or unanticipated. If the inflation rate corresponds to what people are expecting (anticipated inflation), then we can compensate and the cost isn’t high. For example, banks can vary their interest rates and workers can negotiate contracts that include automatic wage hikes as the price level goes up.

Problems arise when unanticipated inflation rears its ugly head:

  • Creditors lose and debtors gain if the lender does not expect inflation correctly. For those who borrow, this is similar to getting an interest-free loan.
  • Uncertainty about what will happen next makes corporations and consumers less likely to spend. This hurts economic output in the long run.
  • People living off a fixed-income, such as retirees, see a decline in their purchasing power and, so, their standard of living.
  • The entire economy must absorb re-pricing costs (“menu costs”) as price lists, labels, menus and more updated.
  • If the inflation rate is greater than that of other countries, domestic products become less competitive.

People like to complain about prices going up, but they often ignore the fact that wages rises as well. The question whether inflation is rising, but whether it’s rising at a quicker pace than your wages. Inflation ~ Real Estate The Answer? Finally, inflation is a sign that an economy is growing. In some situations, little inflation (or even deflation) is bad as high inflation. The lack of inflation is a sign that the economy is weakening. As you can see, it’s not so easy to label inflation as either good or bad – it depends on the overall economy as well as your personal situation. So what about real estate as a hedge against inflation?  Most of think about it and feel this is true.  If you have a fixed rate mortgage it becomes easy to see how inflation does not bother your real estate investment. You are paying your loan back with dollar of lesser value than the ones you borrowed.  Appreciation has kicked in to some degree and you home is worth more than you paid for it.  And you making more money at your job.

Inflation Graph over the last century

Inflation ~ Real Estate The Answer?

John Waggoner of USA Today a while back implied, If you own a home, you probably have plenty of real estate.  In spite of the horrible real estate market today your home will be a significant inflation hedge in the future. Home prices, if there’s not a bubble, mirror the consumer price index most of the time.  If you have a low 30-year fixed mortgage, in the future it will be a thing of beauty as prices rise. Your home value will rise, your salary will rise but your mortgage won’t.  And you will repay your mortgage with cheaper dollars. The catch; Interest rates tend to increase at the end of an inflationary period, stopping new home buyers from entering the real estate market, which in turn force prices down. Inflation ~ Real Estate The Answer?