A large mortgage on a property now only makes sense as the ultimate hedge against inflation because the government will be financing and subsidizing your tangible property for the duration of the loan.
The reason why long term interest rates are so ridiculously low is that people running our economic system fear deflation so they are spending money that we do not have to kick the can (the day of reckoning) down the road. I think it is now obvious that our government will not allow a deflationary depression. We are heading for a lot of inflation in the future. The government will just keep spending more than it has to try to stimulate the economy.
People really should know that we will not be able to pay our debts and entitlements in the future with dollars that are worth anywhere near what they are worth today. Other nations are already realizing this and they will stop purchasing U.S. debt as soon as they can find a good substitute.
The Obama administration government is keeping long term interest rates insanely low through the monitory manipulations of the Federal Reserve. The government took over almost all mortgages and is taking huge losses on these mortgages and that loss is being added to our national debt. The latest rumor is that the Obama administration is now going to forgive part of the principle and adjust principle on mortgages to what a house can be sold for. That of course will impact the U.S. economy in several ways.
It will increase the national debt by hundreds of billions of dollars causing the Federal Reserve to create even more dollars out of thin air. On the positive side it will stop many that are walking away from underwater loans so it will reduce foreclosures. The idea is that less foreclosures will stop depressing the housing market so the downward spiral in housing prices will end. That assumption is probably correct. If they do reduce principles on loans housing prices will soon bottom unless there is much higher unemployment, but the government will not allow that to happen either. (That statement will be explained later in this article.)
With that said, I believe now is the time to buy as much real estate as you can for as long a term as you can. I can think of no better hedge against inflation and I will now tell you why.
Interest rates for home loans are now about 4.5 % on a thirty year loan. If you are in a normal tax bracket about a third of that interest will be recovered as deductions in Federal and State taxes. So effectively most would be getting a 30 year loan at a 3% interest rate. Now look at the 100 trillion in debt and entitlements that will come due in the next few decades and tell me that inflation will average less than 3% a year for those thirty years? I think anyone suggesting that inflation will be that low in the years ahead should be locked in a rubber room so they do not hurt themselves and others with such financial advice.
We can look at the past and see that we had significant inflation since the Federal Reserve was created. I believe the dollar lost 97% of its value in that time. I do know that fifty years ago just about everything was 10% the cost in dollars that it is today. A candy bar was a nickle. Gas was 22 cents a gallon. A new car was about $1500 and a new house could be purchased for about $10,000. What was the inflation rate over the last 50 years for there to be a ten fold increase in prices? I will let you do the math but the inflation average was obviously higher than 3%. Heck, we had 18 percent inflation in just one year under Jimmy Carter.
Now we should look at the future. Do you think inflation will be higher or lower than it has been for the next 30 years? Even the government says it will be higher and they now manipulate their inflation numbers to be 1 or 2 percent less than what they really are. I believe it is very likely that the dollar will lose as much of its value in the next 10 years as it did in the last fifty. I think it will lose at least 95 percent of its value over the next thirty years.
Obviously those holding long term low interest notes are going to be the big losers (the government holds almost all mortgages today) and those with mortgages are going to be the big winners. If inflation averages 6 percent a year over those thirty years you are actually purchasing your house at a -3% interest rate. If inflation averages 10 percent (and that is probably closer to reality) you are purchasing your property at a -7% interest rate. If we go into hyperinflation as some suggest we will in the next couple of years, you essentially will have purchased your property for close to nothing (other than what you put down).
The bottom line is that the U.S. government will be subsidizing residential property bought today for the life of the loan. However, the taxpayers pay the bills and if you are a taxpayer you are going to pay for those that get a home mortgage at ridiculously low interest rates whether you get a mortgage yourself or not. So you can either just help pay for the mortgages of others through more taxes and a devalued dollar or you can get your fair share by financing all the residential property that you can qualify for.
You might want to look at the moral issues before you do this. I personally think it is just being a wise steward, and I will tell you why. Many are buying gold and other tangibles as a hedge against inflation in the future. Nobody sees anything wrong with that. You would just be buying a more practical tangible asset that you can enjoy and live in or rent. In the long term, a house should always be worth what it costs for the labor and materials to build it minus depreciation plus the cost of the land (they are not making any more land either but population continues to grow). The house and land will adjust with inflation in the long haul. Gold is very high now and although housing was artificially high it has now come down to near the costs to buy the land and build. Gold prices already have adjusted for some future inflation but housing has not. Besides, you cannot buy gold with low interest rates subsidized by the government but you can do that with residential property. So which is the better tangible to own knowing that inflation is coming especially if you do not have the cash or want the risk of gold speculation? (The government could confiscate gold at their own low rates; they have done it before.)
Some may argue that Christians should not go in debt but if you put 20 percent down on a house that has the right market value I would not call that debt. You are simply buying something tangible on installments. You can always sell the property. So if the property is worth what you paid for it you are not going into debt to buy it and the value of a well kept house in a decent area should now keep up with inflation in the long term.
Others may argue that there may be much more unemployment in the future and that people with mortgages will not be able to pay them. I do not see government allowing much higher unemployment to happen. If unemployment starts going up again they will just print more money and create public jobs or benefits out of thin air and just add the bill to the national debt (insuring that there will be even more future inflation in the future). As a last resort I think some administrations would even resort to war or an overblown crisis to keep people employed. The government is not going to allow deflation with high unemployment. They will continue to kick the can down the road as they always have and inflation will wipe out most debt (and savings). Your wealth during this inflationary period should be in tangibles unless you have your own connections to those with money and power.
It is really hard to say when the dollar will start dropping in value. I think it could only be months away but there are too many external factors possible for anyone to figure it out. But drop it will! This link will give a good perspective on the death of the dollar. One thing is for sure, interest rates cannot go much lower and at the first sign of any inflation they will shoot up suddenly. Notice that whenever there is a bit of good news about the economy that oil prices go up. Whenever there is bad news it goes down. Well imagine what might happen if the world actually has an economy recovery. What do you think rising oil prices will do to the prices of everything else? Or suppose we or Israel bomb Iran. What will that do to oil prices and inflation? Inflation is not just going to be demand driven in the future either. Our debt burden and all the printing of funny money is going to devalue the dollar and higher interest rates will be demanded by those taking the risk to keep investing in them.
Everyone knows our day of reckoning is coming but they do not know what else is safe right now so they are holding dollars. If oil goes up they will be dumping dollars for sure. When that day comes it will come suddenly. At that point you can forget about being able to finance mortgages at low interest rates. So I think the wise and astute will get moving in the next few months while interest rates are artificially low if they want real estate as a tangible investment and the ultimate hedge against inflation.
Nevertheless, I am not a professional financial adviser, this is only given as food for thought. So don’t just take my word for it or blame me if you lose your butt on real estate. Think what I said through, and also pray about it. You might also read this article about the Desperate Economic Action ahead
Hi Don, I’ve been a home builder for about 28 years now, and my father before me. Just a small family business. So I have somewhat of a working knowledge on this subject. Without going into to much detail here, you make valid points. The most valid though is that as a home buyer you must bring something (either cash or some sort of equity like already owning the building property or sweat equity)to the table.
At risk of being overly simplistic, far to many folks brought absolutely nothing to the closing table. This may seem mean to say but they just did not deserve to have mortgages. I would agree probably in about 36 months, give or take, 5% fixed mortgages are going to look real good, provided you can pay them.
On a side note. I’ve gotten sick and tired of listening to the democrats over the last 20 or 30 years claiming that the rich are getting richer and the poor are getting poorer. In the last two years (under democratic leadership) this is exactly what is going on. This is precisly why the stock market is where it is today. I read an article recently that said something like 83% of stocks are in the hands of only 1% of the people. http://www.businessinsider.com/22-statistics-that-prove-the-middle-class-is-being-systematically-wiped-out-of-existence-in-america-2010-7
I know in my area several well to do folks are buying up properties for pennies on the dollar. If you can do that without borrowing money, in the coming years you’ll be sitting pretty. I realize this is just anicdotal evidence but it is true nevertheless. I recall someone saying once that even if you took all the money in the world from the rich they’d have it all back in a generation. But I digress.
To bad you don’t live around here. I need a builder that actually knows how to build a house. We have a lot of builders in the Ozarks but since there are no building codes they most often just build their own unique mess.
The house I now own is a 9 year old 2000 sq ft house built by the owner. It has absolutely no foundation. The whole house just sits on cinder blocks. But that’s only a sample of the problems. Don’t blame me for buying it. I never saw anything but a few pictures of the house. I was sitting in New York for a year trying to sell my other house and was stuck their with five dogs. It was my wife’s doing. She never even looked under the house and did not noticed or care about the other irregularities and the degradation and neither did the appraiser. I think over 3/4 of the houses built in the rural areas around here are nothing but crap.
Anyway, I figure its getting near time to build a house on that 120 acres of land we recently bought. Don’t know if I want to do a construction loan or finance this house to come up with the cash? I would like to at least get started on building the road and drilling the well before the end of winter. So yeah, I plan to get one of those 5 percent loans but first I have to get my wife to give my a copy of her credit report so I can figure out just how screwed up it is with all the credit card fraud that took place while I was gone in New York. (You just can’t leave some woman alone without leaving a seeing eye dog.)
The Democrats are really no longer the party of the working poor. They are the party of a new two class system. The super rich masters and the plantations wage workers and dole slaves.
I agree with what you are saying, but keep in mind world leaders are secretly devising the end of the dollar in far less than 30 years. And then I found this today: http://www.utalkmarketing.com/pages/Article.aspx?ArticleID=18362&Title=Why_contactless_payment_paves_the_way_for_a_cashless_society
Please read the entire article. We are getting closer and closer.
There is no secret about the card companies are wanting to go to cashless society. I remember a number of years ago VISA saying they wanted to go cashless by 2012. But getting it implemented other than in select pilot projects is more difficult than they conceived.
In any case, an electronic dollar is still going to be worth whatever a dollar is worth. almost all dollar transactions are now electronic anyway. The electric transfers just have not reached the low end consumer transactions yet and certainly will not be in the third world rural areas for quite awhile.
By the way, there is nothing really wrong with getting rid of paper. Sure It will allow for a system that will probably develop into the mark of the Beast system but it is not the mark of the beast until it is set up world wide and the False Prophet forces people to take the mark of the Antichrist in order to buy and sell.
An electronic dollar (or whatever they end up calling it) will be backed up by gold and other precious metals. This is why the world’s central banks are net buyers of gold the past few years. Here is another great article to read, especially the last 1/3 of the article:
http://mises.org/daily/4620
They already have electronic dollars and they are only backed with good faith.
The world is not going to back a world currency with Gold. People that make these speculations are in the gold selling business. In other words they are selling you their line.
Ever wonder why those that horde gold for the last days weep and howl and they throw their silver in the street? (Jas 5-1-3). Perhaps because Gold or Silver will lose most or its value when nobody can speculate with it anymore. In other words, gold will just be used for electronics and maybe jewelery but I bet they even develop man made substitutes for that.
But Hey, if you want to trust in gold keeping up with inflation don’t let me stop you.
Well, I’m in the black and I don’t really have a mind to go in to debt to buy some piece of land somewhere; We are in the midst of home improvement, long overdue, but generally coming to a close by year’s end if not sooner (been many years of work, particularly that last two) — all of which done “in the black”;
Frankly, I’m more interested in investing in survival goods and all that entails; If I were to buy property, I would rather move (to South Carolina) and sell my existing property (and, get out of the line of fire) – while moving to a much more simple and self-sufficient lifestyle;
Your “blog” seems to offer hope that I possibly could sell my property, but at this point I’m thinking along the lines of “digging in”;
(You just can’t leave some woman alone without leaving a seeing eye dog.)
Don, sure you don’t need a dog house to reside in first?
You gotta open your mind Don. ANY currency in the future will have to be backed up by ‘something’ for people worldwide to be willing to use it.
Ours was backed by gold for decades, then was backed by debt, which is failing.
“But Hey, if you want to trust in gold keeping up with inflation don’t let me stop you.” Not planning on being here. The Rapture, you know?
Hi Don,
Been reading your blog several months now and enjoying it. I don’t know where you live in the Ozarks, but we have 80+ acres near Theodosia, MO and recently had a small house built by a local “Handyman”. (We presently live in Colorado, so all of this was done more or less long distance.) He did a wonderful job . . . and I’m something of a perfectionist and hard to please. This is the first house I ever owned with square corners and miters that actually mited! 😉 The foundation is a bit of overkill, but that house isn’t going anywhere short of an end-time style earthquake. If you are near Bull Shoals Lake and are interested, I’ll give you his name. He’s an honest man, a Christian, and real craftsman.
Doug
Creig,
Do what you think is best. I think the most favorable conditions to sell a property will be from early next spring until the 2012 election (and I am not saying that selling conditions will be good even then). After that the inflation will hit and prices of houses and everything will soar. It also will make it impossible for those that have to finance. Of course inflation could hit sooner but somehow I think they will minipulate things until the election.
Ken C, we have already been over her gullibility and lack of judgment when left alone and she actually agrees. Besides, she seldom reads my stuff which is probably part of the problem
Frank, Any new world currency will probably be backed up with a market basket worth of national currencies and the value of that is what nations of the world are willing to pay for other nations goods. In other words world trade really is a barter system. Using paper printed by nations is just a tool. It just means that one nation does not have to have to actually trade a tanker full of oil for a boat load of wheat of equal value. Now that we have world trade agreements, money be it paper or sea shells, has no real value and it probably never will again. It is worth what other people say it is worth and if you hold notes of any nation you are really holding IOU’s backed by that government.
The Rapture may happen during the next ten years but I would not bank on it 😆
Doug, There are some good builders around here but you have to ask around and check references. The real problem here is the people that never built a house but decided that they were going to build their own house and learn as they go. Over half the houses around here were built that way.
Theodosia is a long way away but it sounds like you found a gem of a workman. I am about 3 hours NE of that area. I find that the best builders are those that learned to build in another state and know the codes and then relocated here.
I just hope they don’t do away with the homeowner tax credit. But if it’s God’s Will then who am I to complain?
What homeowner tax credit? If your taking about mortgage interest deductions I suppose they will take that away if they can. Of course a person would have to be a virtual dictator to do it because mortgage interest deductions are too popular. More likely they will limit or eliminate the deduction just for those in the higher income brackets.
Another possibility if Republicans get into power is that they will eliminate the income tax and go to a consumption sales tax and then they will do away with all deductions. In that case people that can, might want to pay off their mortgage as fast as they can if the inflation rate is higher than than the interest rate on their loan.
Indexing everything to inflation is also another possibility. Politicians certainly have tricks up their shelve and they will pull them out if they think they can get away with it.
One more thing, don’t blame God for the mess that man gets himself into because of sin.
Since I brought this up in a previous comment it seems that the credit card companies did get all that identity theft fraud and associated withheld payments off the card of my wife. So I do have to give them credit where credit is due. After reading the reports from two out of three of the credit scoring companies her credit should be excellent. So I think I will soon be taking out a low interest loan in order to build a house on that 120 acres we have.
Hmmmm, well all that’s interesting. God will almost certainly be providing for my family in a different way as the path to accumulating resources is not possible for us.
If it (still) matters when we meet in eternity, it will be interesting to “compare notes” to see how our *extravagant* Heavenly Father has keep each of us, His children.
We praise Him that He has been providing for us, and those He brings to our household, though we cannot see exactly how before hand! He is amazing, and it *is* getting easier to trust Him in this…
I hope you understand that I was talking about the economic realities of living in America in this post. I am not telling Christians to accumulate riches. God does provide but he often provides through the economic systems we live in.
The children of the world are often wiser than the children of light in matters of material stewardship. That’s why unbelieving billionaires control almost all the major foundations that run charities that help people but promote humanism. On the other hand, the children of light often lack wisdom to use economic realities to be good stewards of the world’s riches so they can use their riches to promote the Kingdom of God.
Hi Don,
I’m not sure if you were referring to my comment or not, but I could have phrased what I wrote better:
When I referred to “accumulating resources” I didn’t have in mind storing up treasures here on earth. What I meant was that our life is such that we don’t have much “operating capital,” certainly not what would enable us to invest in much of anything here. That is, for reasons beyond my control, my “net worth” is negative.
So, for people God has blessed to be able to invest, may they do so wisely and bring Him glory. For those of us who are blessed in a different way, may we bring Him glory too! That’s why it may be interesting to compare notes because He is *so faithful*!!
I guess your comment just brought to mind obvious points that some might bring up in a conservation about a Christian hedging against inflation. So I thought they needed addressing.