Mortgage Meltdown: Inflation, Devaluation and the Price of Your Home

The reality of inflation is that it is robbing nearly everyone blind and is going to get much worse before it gets better.

 

http://www.forbes.com/2008/04/08/inflation-milk-bread-ent-fin-cx_ml_0408grocerprices.html?partner=weekly_newsletter

 

  • This is the period I was talking about where merchants and consumers alike get caught in the middle. Some merchants can take advantage of inflation but most are stuck with being the “bad guy” — it is always the messenger that gets shot. This is like a triple barraled cannon. 
  • So consumers are paying more and more but they don’t even know that the merchants are doing everything they can to soften the pinch on consumers. In fact, they think the opposite is true and they blame merchants for using inflation as an excuse of increasing their margins when in fact the merchants are making far less money. 
  • This can ONLY mean that future price increase, at least double what we have seen are in order and as you can see from the front page of the Wall Street Journal, the effects of inflation are causing social unrest and violence. So to your question about home values: the bottom lines is that VALUES (measured in today’s dollar will probably continue down for a while). PRICES will continue up. 
  • When it costs $20 to buy a loaf of bread it is inconceivable that the price of a house won’t eventually reflect these changes even if the correspondence is uneven and fluctuating. 
  • Using models that appear to be valid now this can be figured as follows in an example I made up: 
  • Note the difference between value and price. 
  • VALUE is first based upon the price you could get today. It is therefore the same as price. 
  • VALUE changes with market conditions. Increased demand and diminished housing inventories causes demand to rise in proportion to supply and VALUE goes up. 
  • PRICE represents the measurement of VALUE. 
  • PRICE changes occur as a result of two things: (1) changes in VALUE and (2) changes in the value of the currency being used to purchase the asset. So if inflation and devaluation of the dollar were not a factor, then VALUE and PRICE would always be the same. 
  • And usually the difference, while present, does not figure prominently in the negotiated price for a house. 
  • That is all changing now because the dollar is slipping every other day and prices of everything are going up at rates reaching nearly 100% in some cases and the rate is expected to increase exponentially. 
  • So NOW the inflation and devaluation of the dollar must be taken into account when projecting the future price of an asset (in this case a home). In a flat market with inflation, the home would be no more desirable than it was before. But because of the fall of the purchasing power of the dollar through inflation and devaluation, the PRICE would still go up. Example. $200,000 house is still worth the same after 3 years. BUT the price still goes up by the amount of inflation. 
  • Stated inflation through reporting of the CPI is now like EPA mileage — completely out of touch with reality. And reality is what people deal with, not government statistics. 
  • EXAMPLE: Today’s home VALUE: $200,000 
  • Today’s home Price $200,000. 
  • 1 year from Now: 
  • home VALUE: $160,000 – $180,000 in today’s dollars as of April 14, 2008 (assumes 20% decline in home VALUES, which might be excessive) home 
  • PRICE: $184,000-$207,000 as of April 14, 2009 purchasing power of your dollars, assuming 15% inflation 
  • 2 years from now: 
  • home VALUE: $180,000 – $200,000 in today’s dollars as of April 14, 2008 (assumes 10% increase in home VALUES, which might be excessive) 
  • home PRICE: $234,000-$260,000 as of April 14, 2010 purchasing power of your dollars, assuming 15% inflation 
  • 3 years from now
  • home VALUE: $190,000 – $210,000 in today’s dollars as of April 14, 2008 (assumes 5% increase in home VALUES, which might be excessive) 
  • home PRICE: $275,000-$304,000 as of April 14, 2011 purchasing power of your dollars, assuming 15% inflation 

Of course this might look good on paper, but the only way it will have any meaning to you is if you sell the real estate for the “inflated” price, pay off your mortgage, and downsize to something much smaller. The reason is that the price of everything has gone up along with your house. 

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