Wednesday, August 20, 2008

Inflation Discussion

ARE WE IN AN INFLATIONARY ENVIRONMENT?

FOOD PRICES? ENERGY PRICES?

WHAT EFFECT DOES IT HAVE ON THE PRICE OF OUR HOMES?

  • How is inflation measured and how is it different than the rest of the world? (Source:Investorsinsight)
  • It uses the consumer Price Index (CPI) with:
  • Hedonic quality adjustments (i.e. computers going down in price for equivalent function)
  • Geometric weighting/product substitution (i.e. people switching to hamburger vs. fillet mignon when beef prices rise)
  • Calculation of housing cost via owners' equivalent rent (rent is used in calculation)

THE 1940'S AND 1970'S HAD THE HIGHEST INFLATION

HIGH INFLATION SUGGEST LOW STOCK MARKET RETURN

HIGH INFLATIONARY PERIODS SUGGESTS BETTER THAN AVERAGE HOME PRICE INCREASES

Why is this one of the best times to buy a home?

  • If inflation continues to be an issue, buying homes may be one of the best hedges.
  • Compared to the 1970's, interest rates are still low...but they may not stay that way
  • House prices are down
  • First time in history that median house prices have fallen year over year
  • "When everyone is greedy, be scared. When everyone is scared, be greedy." - Warren Buffet

The current home price decreases we are seeing is not sustainable for a long period of time.

  • Home prices will have to increase, because:
  • Builders will exit the market, due to a lack of profits, creating a shortage of builders.
  • Foreclosure hangover will correct, because of bargains, when the market realizes the inflation effect, thus reducing inventory.
  • Increases in material prices will force new home prices upward.
  • Building standards are constantly increasing, thus adding cost.

Summary

  • We are entering an inflationary environment reminiscent of the 1940's and 1970's
  • The US inflation rate is actually higher than reported, because of how it is measured
  • In inflationary environments, home prices have shown big returns, while the stock market has shown lackluster returns
  • Current home prices are down, but can't stay that way, because of inflationary cost increases
  • Interest rates are still low, but history suggest that they may soon rise.

SO THE TIME TO BUY IS NOW!!!


posted by Ed Leavy at 7:13 PM | 0 comments links to this post