patrick.net

If you could buy a security that represented the historical average house price over a huge range of areas, then maybe it would hedge against inflation (the same as most other durable goods or commodities).

Unfortunately, buying a house is very specific---you purchase a single home in an exact place under a certain set of financial decisions. And circumstances can intervene heavily. Divorce or job loss could compel a move at a bad time, the area could experience bad economic conditions, and so forth. The same is true of potential gains.

There are much more effective ways to defend against inflation, which folks like DinOR, Randy and FAB have deailed ad naseum in prior threads. The best advice is quite simply to own productive assets, as their revenues and output tend to scale with inflation. I personally prefer stocks of companies I understand, as I can choose the right times to buy or sell liquid securities.

Buy a house to be a long term home. It's risky business using it as Average Joe's vehicle for leveraged speculation.

We have deflation now. You won't see inflation until the economy overheats, and right now it is on life support. I have read that houses are historically flat, meaning they hold their own against inflation. You are not going to see inflation with 11% unemployment. Neither are you going to see rents going up, because that unemployment rate will not attract anyone to move here. I would not be surprised that people are moving away from California. From what I see, there are huge vacancy rates in the big complexes. Rents are falling. Wages are falling. There is a proliferation of low paying McJobs. The Federal Reserve is very effective at making sure that wages stay low.

Obama seems to like the idea of cutting spending. I see him as becoming more restrained once the economy gets better. This is the opposite of what Bush was. I don't see government spending causing inflation in the next few years. Investment in development will still be in the third world, so that won't affect this country. People are afraid of inflation who lived through the 1970s.

Wage inflation would hurt the banks, since their mortgage debt would be easier to pay off.

The Federal Reserve is owned by the banks, not by the government. I believe that the Fed will not allow higher wages to any significant degree, because their priority is to protect that banks.

On the other hand, mass defaults hurt the banks more than wage inflation, so the Fed has a motive to inflate just to the degree that people stop defaulting. No further.

IMO buy a house if and only if:
* You plan to stay for 7 years or more
* You do not want to go with fancy financing, only 30 yr fixed
* The area is not a warzone like Oakland, Richmond, etc.
* Rent to Mortgage Obligations (PITI) is no more than 1:1.8
* You have 12 months of PITI plus monthly expenses in the bank
* You are putting down 20% minimum

There is no right or wrong time as long as you stick to these principles. At the end of the day it is a shelter, nothing more or less and you have to live somewhere.

OT
http://latimesblogs.latimes.com/culturemonster/2009/05/green-prefab-firm-michelle-kaufmann-designs-is-closing.html

Michelle Kaufmann's modern prefab, probably the largest in the US, is closing down. Frankly I am not surprised, because the per sq ft cost comes out to be close to $400, way more than stick built. While I was doing the research, I found out almost all her clients built with excessive debt load (duh!), and I was planning to pay cash to rebuild my home, there is no freaking way I am going to spend $400/sq ft to build. Her company has no economical reason to exist if not for the easy credit.

However, I was hoping all these early adopters will help pull down the price point. Too bad that her company will never reach the scale that makes the product economically viable.

The fact that there are so many custom new houses being built in the last 5 years is also a reflection of the ridiculously easy credit. I know how much my neighbors make roughly, I know how much their newly built homes cost. All I have to say is, either they all won a lotto ticket I am not aware of, or they are real brave men. They must be fearless in taking on debt, after checking them out on propertyshark.

IMO buy a house if and only if:

* You plan to stay for 7 years or more

* You do not want to go with fancy financing, only 30 yr fixed

* The area is not a warzone like Oakland, Richmond, etc.

* Rent to Mortgage Obligations (PITI) is no more than 1:1.8

* You have 12 months of PITI plus monthly expenses in the bank

* You are putting down 20% minimum
There is no right or wrong time as long as you stick to these principles. At the end of the day it is a shelter, nothing more or less and you have to live somewhere.

I agree with your first two points. I'm not on the West Coast, but I can infer what you mean. The area I want to buy in (that I rent in now) is one of the more well regarded school districts in the area.

With respect to the rent to PITI ratio, is that based on current rent, or what it would cost to rent a similarly sized place to the house I would be buying?

Here's my problem with the last two points. If I wait until I have BOTH 20% down and 12 months PITI, It could be another decade before I can buy something.

The idea to buying now, even if it's a bit early, is to lock in a payment, so that if inflation starts to take off (and rents rise accordingly) I'm not squeezed when it finally comes time for me to move to a larger place.

Housing is only a hedge against inflation if you are a strict investor, with several housing deals, and the cash to buy many more. Otherwise, its still just a very expensive, stressful home.

If you have seen the Schiller index showing that housing has only averaged a 4% rise in value over 100 years nationally, you'll realize that in real terms you will still be paying more for everything else as a homeowner, especially in the inflationary years, with little value to your bottom line. The added cost of homeownership in general will continue to encourage renting - with closing costs, taxes, insurance, upkeep, maintenance, and additions being pricier as well during higher inflation, all things you won't have to pay as a renter, offsetting most gains.

How high will rent increase as a result of inflation? Will it really hurt your cash flow? Those are the real questions, and frankly, maybe the unknown at this time. If you really want to be wise, renew your lease now for five years at the current rental rate, and stay put to fight inflation. That's a much better use of your money for the next few years while you wait for things to simmer...

Buy a house if the following hold true:
-You believe Inflationary times are coming
-You can find a house RIGHT NOW for what it would cost you to build it or less.
-You can afford the DP and still have a cushion in savings.
-You want to live in it for the long term and like yard work.

Buying a house as your only hedge against inflation is not smart. Buying a house as part of your long term financial planning MIGHT be smart. There are ways to hedge inflation without buying a house. If you can buy a house cash with less than 50% of your liquid assets, maybe it makes sense as an inflation hedge. If you have to leverage to get into it, ONLY do it if it's cheaper than renting. I think housing will deflate into the inflationary headwinds. By the time housing/rents are going up, salaries will be going up, and you will have more salary to buy the house with at a more traditional rent/mortgage rate.

I'd rather be a little late getting in at the bottom than risk being early and getting in well before the bottom.

"Here’s my problem with the last two points. If I wait until I have BOTH 20% down and 12 months PITI, It could be another decade before I can buy something"

The above statement should essentially indicate that the house purchase is outside of your means. I know that is a bitter pill to swallow, but one of the major contributors to this housing boom and bust was the lack of effective fiscal planning by those purchasing homes.

There is a reason that concepts like 20% down and loan to value ratios came into being; it was because they provided a solid indicator of the baseline requirement needed by those entering the housing market. Not to go off on a Susie Ormond type rant, but it really does come down to whether or not you can afford it.

Note that banks are now wising up to the baseline requirements for home purchase as we return to normality. I doubt you will be able to easily find a loan provider willing to give you a loan in this economic climate if you don't bring 20% down to the table. In fact, I have heard stories of banks asking for 30% down if it is a first time home buyer and the loan is of a certain size.

But the better point of the above statement is that if you are unable to purchase a home and you fall within the median level of income for your area, what that demonstrates is that home prices have further to fall. If you can't afford it, neither can anyone else.

"I doubt you will be able to easily find a loan provider willing to give you a loan in this economic climate if you don’t bring 20% down to the table."

I wish that were true, but it isn't. I know several people approved for 3.5% down, and one person who just bought a house with 3.5% down. Not sure how it's all working, but there are still a lot of sales with nothing down, and a lot of people speculating and over-extending themselves still.

"I wish that were true, but it isn’t. I know several people approved for 3.5% down, and one person who just bought a house with 3.5% down"

Interesting. I have heard the opposite. A colleague of mine tried to purchase a first home and the loan provider was asking for 30% down. These are both professionals with working jobs. Yet the bank was being far more stingy than they thought.

I've also heard of scenarios where people were attempting refis with little equity in their homes (many were I/O loan folks) and the banks refused the refi to a 30 year fixed due to a lack of equity. Many were asking for an additional lump sum before they considered refinancing the loan.

Ultimately, if banks are still lending for a 3.5% down payment, that ultimately demonstrates that we are still no where near the housing bottom and these folks are just catching falling knives.

The 3.5% loans are FHA loans, but they are available and plentiful. They have restrictions however, which is probably why we do seem to have come close to a bottom on the lower end (homes less than 300k in California). However, I agree we are no where near a botton in the mid to higher end homes.

I've seen FHA loans for 3.5% down, and conventional loans advertising as little 5% down.

Taxes & Insurance alone in this neck of the woods are $1000 to $1200/month. There is very little out this way for $250k. Most "good" homes are $350k or more.

Lets assume I wait until I have 20% down plus six months PITI + expenses. Even if I get a rock bottom, entry level shack at $200k, I'd need $70k in the bank to pull it off.

Now I'm not going to comment if that is in my means or not, but its hard to fathom needing $70k just for a starter home.

That said, the median income can almost support the median price, so I don't things will fall much more. They have already returned to 2003 levels in some areas.

Anyhow, a house certainly isn't the only hedge a against inflation, and buying one solely as a hedge is foolhardy. what I was getting at in the OP is how much of a hedge is it really? Most comments have answered that question decisively.

There is no such thing as a starter home. I wouldn't buy something unless it's the type of home that you want to be in for potentially the rest of your life. The whole starter home idea was NAR pap.

Buy a house if the following hold true:
-You believe Inflationary times are coming
-You can find a house RIGHT NOW for what it would cost you to build it or less.
-You can afford the DP and still have a cushion in savings.
-You want to live in it for the long term and like yard work.

Another thing you should keep in mind, if your purchasing a house as a hedge against high inflation or hyper-inflation, you can't rip a few bricks off it to pay for food. You should have other assets that are more portable for bargaining for goods and services (ie Silver, Gold, etc. )

I agree with your first two points. I’m not on the West Coast, but I can infer what you mean. The area I want to buy in (that I rent in now) is one of the more well regarded school districts in the area.

Just were exactly are you looking anyway? Somewhere on the east coast, I seem to remember Florida as a location for some reason. Where's the secret EastCoastBubbleboy bat cave located?

if your purchasing a house as a hedge against high inflation or hyper-inflation, you can’t rip a few bricks off it to pay for food.

True, but you can rent out a room at the "inflated" price. And if you can find a rental property that presently rents to approximately cover the present PITI, the rent will rise with inflation while the PI part stays constant.

I have one paid-for rental property. If we get inflation, I can raise the rent to compensate. If we get deflation, I will have to lower the rent, but I will be paid in more valuable dollars.

True, but you can rent out a room at the “inflated” price.

I prefer to the barter method in renting out my bedrooms. I find a nice cute 20-something girl with questionable morals and offer the bedroom to her in exchange for certain accommodations.