RE and inflation: to buy or not to buy??

[ER59]

I am currently sitting on 10% gold and 90% cash, and the thoughts of coming inflation make me very nervous.
Since I don't want to invest into stocks more than 40%, I am trying to figure out if an investment in RE as a primary residence (I am renting now) makes sense.
As I understand it, during inflation RE prices go up (as everything else), but at the same time, inflation causes mortgage rates to rise also, which makes RE prices to go down.
So my questions are
1. what would have a bigger impact on RE price - rising interest rates or rising inflation?
2. what makes more sense - to buy now with 20% down, and lock in at a very low interest rate, or wait until inflation hits, mortgage rates rise, RE prices drop and buy cheaper for cash or with a large (50%-100%) down payment.
I live in So. Cal, and to be realistic, assume to keep the property for about 10 years.
Any opinion would be greatly appreciated.

[jpatter666]

Re: RE and inflation: to buy or not to buy??

In California? No.

I'd expect taxes in CA to continue rising. Also, CA RE tends to be very expensive (even now) -- unless you've found a very serious deal.

Inflation would normally cause RE prices to rise, but they've already risen substantially over the past decade. So inflation would be counterbalanced by the deflationary crash in RE. Also, rising interest rates will also cause the price to decline.

I understand the desire -- my wife and I own our place, but it's modest, easily maintainable and we bought well before the boom.

Essentially -- if you are looking at RE as a place to invest and preserve cash, don't.

[ER59]

Re: RE and inflation: to buy or not to buy??

Essentially -- if you are looking at RE as a place to invest and preserve cash, don't.

Then where and how?

[jpatter666]

Re: RE and inflation: to buy or not to buy??

Then where and how?

Well, that's the big question, isn't it? I think we are all struggling with it, and we all have variations as to what we are doing.

EJ has been gold and treasuries, but is moving to a portfolio of gold and stocks (and MLPs I think). But he's also done things like buy a new diesel car -- and financed it.
Others (D&G?) are buying farmland in Uruguay. Jtabeb is nearly all physical PMs and I think rare earths as well. GRG55 is building a bunker.
I've got a townhouse in the inner suburbs of DC, but some land (with water) in central Virginia. I've got a mix of cash, PMs and stocks I think will benefit from money printing. We've also eliminated nearly all our debt. That's me.

We don't know anything about your net worth, goals, or your level of risk. Put some serious thought into those and it will lead you to your decision.

[ThePythonicCow]

Re: RE and inflation: to buy or not to buy??

I've been cash and gold. I'm about to put some cash half into shorting the general market (e.g. SH) and half into long gold shares (USAGX to be specific, my favorite precious metals equities fund.)

I'm expecting a market downturn soon, perhaps within two or three weeks. I expect gold shares will hold up better this time than in the 2008 downturn.

But I am even more confident that whatever either the general market or gold shares do, gold shares will do better (or at least not as bad, as the case may be.) So going short one, long the other, should be a net winner (perhaps even a win-win.)

[grapejelly]

Re: RE and inflation: to buy or not to buy??

buying real estate when interest rates are near zero isn't a good idea. So I'd opt for #2 on your list.

[jpatter666]

Re: RE and inflation: to buy or not to buy??

buying real estate when interest rates are near zero isn't a good idea. So I'd opt for #2 on your list.

Look at patrick.net for some good markers on whether to buy or not.

[stetts]

Re: RE and inflation: to buy or not to buy??

Dear Pythonic Cow,
What an odd coincidence. I prefer USAGX as well. And agree with downturn since I hold FAZ. So N and S Texas agree. Wish there was a better alternative to FAZ.
Thanks and take care. Stetts

[jpatter666]

Re: RE and inflation: to buy or not to buy??

Dear Pythonic Cow,
What an odd coincidence. I prefer USAGX as well. And agree with downturn since I hold FAZ. So N and S Texas agree. Wish there was a better alternative to FAZ.
Thanks and take care. Stetts

FAZ...well, good luck with that -- but advise from a previous holder of FAZ. If the chips don't fall your way soon and stay that way -- get out. Triple-levered stocks decline fast regardless.

[Jeff]

Re: RE and inflation: to buy or not to buy??

I sold my primary residence in South Florida in 2006, after chewing my nails for 2 years while it ballooned in value, but didn't sell. Finally, it did and I made a gazillion on it, but I'm not sure the 2 years of therapy, anti-anxiety meds and increased alcohol intake were worth it. I'm a happy renter now in Northern Cal, and wouldn't trade the ability to pick up and leave for anything. There's a lot to be said for liquidity, and brother, real estate is not.

[Jay]

Re: RE and inflation: to buy or not to buy??

I have spent 4 years fighting off every friend and family member who said I was crazy to sell and rent. I'm not about to capitulate now. Liquidity is more important to me. Times are wacky, and I want flexibility. If we need a place to stay, there will be plenty. Without wage inflation, I wouldn't bet big on a decreasing dollar making your mortgage debts smaller in real terms, as happened in the 70's. It might happen, but might not. Gold is a much better bet, despite the risks of taxation and confiscation.

For diversification, I am most focused on what small business I can start. I am looking at things where I can use the skills I have developed over the last 10 years, and something is coming soon. It took for me some honest reflection and the advice of a few experienced trusted people to figure out where to go.

The world isn't going to end, so why focus on the worst. I have a backup plan, but now my eggs are focused on creating the future. This is where the power of this community will manifest.

[vinoveri]

Re: RE and inflation: to buy or not to buy??

I would not invest in real estate, but would take advantage of very cheap money to obtain a homestead of my dreams, which I know in my gut I could keep and afford, and which fit in with my long term plans and would where, if the S"HTF, I would be be happy to be living.

[raja]

Re: RE and inflation: to buy or not to buy??

Then where and how?

There is no secure place to invest, since all choices have possible downsides.
The best I'm hoping for is to minimize the loss suffered by my retirement savings so that at least I can survive until my death without having to become a greeter at Walmart when I'm 80.

Deciding where to invest with certainty is impossible, because the degree of the upcoming crisis is unknown, and different investments fare well in one scenario but poorly in another.

Gold:
Gold is a good hedge against inflation and currency collapse. But a money-starved government could inflict onerous taxes on gold sales, or even ban personal ownership (removing competition to the government's currency monopoly), which would play well politically with the non-goldholding majority.
Gold will rise in a mania, and dive down when the mania dissipates. If you catch the top, good, but if not, your after-tax profits won't be as impressive. How will you know that a "temporary" dip is not the beginning of the end.

Real Estate:
Expect it to go lower, despite inflation. Rents will also decline due to the overstock in housing. But still, it won't go to zero like fiat could do in hyperinflation. Also, rents will go up over time, and the population will keep growing, extinguishing the overstock.
There is the danger of property taxes going dramatically higher on "business" property.
"Dead zones" of especially high unemployment in some areas could make it hard to find renters.
If high inflation occurs, a great play is to borrow money at a low, fixed rate, while investing elsewhere the money necessary to pay off the balance. That way the bank will be the loser, as you pay off your loan in inflated dollars. The wild card, however, is the government, which might save the banks by commanding that all bank mortgages be paid off in the "new" dollar, or institute a retroactive indexing to inflation.
Better to wait until RE values sink another 25%, then snap up some properties very cheap on foreclosure, paying cash.
Another threat to RE is a communist-style revolution in which private ownership of property is abolished. I know . . . it can't happen here . . . but nothing would surprise me if things get bad enough . . . .

Stocks: If the economy tanks in a big way, few if any companies will be left unscathed. The big bottom is the time to buy.

Commodities: If the economy tanks in a big way, look for a significant belt-tightening. Less driving, thermostats turned way down, sharp decline in discretionary spending, less products being produced. People will even cut back on food and choose cheap alternatives.

Bonds: If interest rates keep up with inflation, short-term Treasuries continually reinvested would be good. But there is the specter of hyperinflation, in which case the value of fiat turns to dust. Right now, there is inflation, but interest rates are going nowhere.

Another possible strategy is to invest in a business that will survive under a more dire scenario, with a product/service that people can't do without. Income will be adjusted to inflation as time goes on.
In my case, that's a small farm growing my family's food, as well as surplus that can be sold.

The danger of investing in business is knowing what will prosper in hard times. For example, alternative energy seems like a good long-term bet, but if the economy falters, energy usage will be reduced, making alternative energy investment undesirable.

I'm trying to get rid of most of my cash . . . .
I'm doing that by investing in my farm, as well as buying anything I can think of that I will need for the next 20 years.
At some point when the time is ripe, I will try to pick up some more RE cheap.

[Jeff]

Re: RE and inflation: to buy or not to buy??

It took me a second this morning to realize I hadn't written this. (In my drinking days, that happened a lot ;-) Absolutely dead spot on. If you want to invest, start a company.

[BK]

Re: RE and inflation: to buy or not to buy - High Interest rate best time to buy??

Many of the folks who are living the cheapest now were people that bought their homes when Interest Rates were fairly high and Real Estates values were at a corresponding low.

It strikes me has idiotic that buying Now when Interest Rates are at some of the lowest in history- could be a Smart move when the People who did the Best in seeing their R/E asset appreciate purchased in the early 1980s when Interest rates were at Highs.

Am I being too simplistic in my thinking?

I also don't believe there was the massive shadow Inventory in Real Estate in the early 1980s?