Housing Prices Impact from medium (8%) and high (20%) inflation.

Or what would be the effect of hyper inflation coupled with low borrowing rates?

It depends on if/when the inflation makes it into wages. Inflated wages will increase house prices. Inflated food/energy/interest rates without a corresponding increase in wages will bury housing.

Just found this on hyper inflation. Prediction is the Fed will maintain zero interest rate levels in spite of increased inflation. Probably talked to death on some other thread. Interesting though.

http://bloomberg.com/apps/news?pid=20601087&sid=aIeLg1djbBps&refer=home

im workng on piece right now totally targeted to this topic, trying to finish it

Inflation is the Fed's answer to getting the U.S. out of this mess. The Fed will pretend to fight inflation but make it to happen to devalue the dollar and our debts.

Chasing, good point about the wage inflation....so what is you opinion weather it make it to wages or not?

post is up. Would love all thoughts and YES, ChasingWamus is dead on when stating "nflated food/energy/interest rates without a corresponding increase in wages will bury housing."

http://www.urbandigs.com/2009/05/stage_10_starting_already_expe.html

would love comments on urbandigs about the topic if you have one! You know my thoughts on this very important topic

urbandig.. what do you do? are you the creator of Urbandigs.com?

yes..

So you are MR. NR?

what do i do? well I am an agent with halstead that is about to leave and go on my own...

I was a equities trader with Tradescape from 1998-2004, after following the markets since 1991 or so and spending summer internships with top brokers at MorganStanleyDeanWitter (back in the day)and Salomon Smith Barney...the world is a trade to me. Its my sickness, my weakness.

Noah Rosenblatt, thats me

So what is your views on the equity market? If hyperinflatin is coming, how are you planning to hedge your cash assets? Do you buy gold, sliver, an apartment or tips?

well, im a day trader, so be careful interpreting what I am doing, because I can exit, unload/refill, at any time as market moves...

im 60% in cash/money markets...im 20% in gold (via gld, dgp, gld longer dated calls)..i put 20% into trading account to play around with - in that account I have been trading accumulating short positions in beaten down etfs...I gave up 45% of gains because I started nibbling shorts too early, luckily still have some nice gains from initial shorts before the market cratered. I have positions in eev, srs, fxp, dxd, mzz, skf right here, all of which are out of the money right now leading to those losses I mentioned earlier. I figure, if S&P falls to 840-850 or so, I should be flat these positions. A bit different with eev,fxp...

however, I do feel like markets need to rally a bit more, so I unloaded some shorts recently and will refill if we rally higher. I also have longer dated puts on some banks/reits...I just see another wave down, who knows exactly when or what sparks it (usually something unexpected but treasury market has been spark lately), but if it occurs I will likely build longer term long positions to hold to for a while. Just my thinking and that can change. You asked for it!! Oh, I sold in mid 2006, and rent. Ill buy if/when opportunity presents itself

we have alot in common.. I love looking at stocks and talking about the equity market. I have to run now.. Will respond to your eev..sds..dxd...shorts.. I did the similar approach, got in to early with shorts and move away from my game plan...

I understand that what you are writing is your opinions and in this market, things can change quite quickly. I have shorted the equity market since the upper 7k in the dow and gave away a fair amount of pontential P&L. I am 80% cash and 20% long equity against my shorts..long/short equity fund. My concerns are inflation and perservation of capital.

no gold?

no gold.. had gld last year and sold it, made a few dollar on it. I want to get back in but at 94.. seems expensive. I am thinking about buying tip or tbt... I am still investigating on my options. My buddy bought gold and sliver bars.

Noah- when did you work at SSB? Wonder if you know my dad

Have you researched how inflation impacted RE in the late 70s/early 80s? A 8%-10% borrowing rate happened in the early 90s and was the end of the last RE boom.. RE didnt really appreciate for years but it did depreciate either, excluding inflation adjusted terms.

interned there for summer of 1996. In Albany. My friends girlfriends mother was a top broker there and hooked me up with an internship. Hmm, cant remember her name for life of me.

urban, why is the manhattan inventory listed at 11k different from the SE figure?

I'm always puzzled by what people think are high/low interest rates and high/low inflation. You know, for the first 8 years of this last bull market rates weren't far from 8%, but now people seem to think 8% is some HUGE number for mortgage rates. In the early years of when I started buying property, rates were much higher: in 1982 the popped up over 185!!!!!! (imagine trying to sell property in that environment), but more importantly for the entire first en years they were over 10% AND THIS INCLUDED THE WHOLE UP CYCLE IN THE 1980's. That's right - you had a boom cycle with rates over 10%.

Right now, I don't think ANYONE is thinking that 8% inflation as "medium". I think most people are thinking "hyperinflation" at 5% to 6%.

but when I see questions like "Or what would be the effect of hyper inflation coupled with low borrowing rates? " I wonder what meaning there is to a question like that, because my answer is "then you wake up" or the moral equivalent.

30yrs - it was a rhetorical question.

so he has no right to answer? rhetorical questions don't have much purpose in a forum such as this.

I have told my story before, but am repeating it as it is pertinent for this thread. My husband and I left NYC and bought our first home in the Jersey burbs in the early '80's. Our mortgage rate was 17 or 18%. Yikes! The prices of the housing was low because people had to pay so much in mortgage payments. Yes, we were given "cost of living" increases in our salaries, but generally housing prices were depressed due to the tremendous amount of money that was going to serve the debt. People couldn't afford expensive housing when they were paying so much for a mortgage. But, life went on, houses were sold. As it turns out, it was actually a good time to buy because as mortgage rates came down, housing prices increased. We were able to sell our starter home for a lot more money, and put that equity down on a larger home at lower interest rates, making approximately the same monthly payment for a lot more house. Isn't that how the bubble began?

One more aside. During that same period of time, the company I worked for bought a lovely brownstone in the East 30's for @ a million dollars. The price was so low because the company was paying an adjustable business mortgage rate that was one or two points over prime. I remember at some point they were paying 22% interest rates on that building! So my experience is that high interest rates will keep prices low and that interest rates can become usury.

aboutready - holy cow, of course he has a right to answer. And what exactly is your post contributing to the subject?

UD - have you seen this? http://www.nytimes.com/2009/05/29/opinion/29krugman.html?_r=1&ref=opinion

Krugman - Does the big inflation scare make any sense? Basically, no. And I suspect that the scare is at least partly about politics rather than economics.

I have seen you predict coming inflation that will pummel the economy and real estate. I'm curious what you think of Krugman's analysis that there is no real inflation threat.

Krugman is implying that we will not face inflation because we will end up like Japan. Tokyo's residential real estate fell over 90% from peak.

That is not quite what he is saying CW.

He used Japan twice as an example of why the normally inflationary activities of the Fed won't result in inflation. This argument only works if he thinks our economy will be similar to Japan's in the 90s.

He also used Canada and Belgium, and the U.S. after WWII as examples. This argument can work if the Fed timely identifies when the economy is growing again and adjusts monetary policy appropriately.

LIC - well only yesterday I wrote the following in agreement with Krugman about the mis-perception that money printing will create the kind of inflation that people here say will inflate real estate prices (ultimately yes, but at first no):

"7) Money is being hoarded in excess reserves, which pays interest to banks, instead of flooding the system - (view image at St. Louis Fed) there was a reason the fed started paying interest on excess reserves back in SEPT of last year! Right when that announcement came, the banks started hoarding cash in excess reserves. This was one way the fed sterilized its actions so that money didn't flood the economy. The real question is what happens if/when this money does enter the system via bank loans, bringing the fractional reserve multiplier effect back into full force. This is one thing the fed will have to deal with later on. I would NOT be surprised at all to see the fed raise minimum capital requirements as part of their exit strategy to contain inflationary pressures of massive lending of newly printed dollars."

Something happened recently that really gave people a sense of a reflation trade:

oil surged
gold surged
treasuries plunged
stocks surged

etc..I think stocks are now surging on the reflation trade and following oil/gold...stocks are also very much attached to treasury market, in a nervous way. Bad auction, stocks fall, good auction, stocks rise. Stocks are not rational, yet they will always be the most widely used guage as to the health of the overall economy. Stocks rise, people feel better, confidence rises. Stocks fall, reverse happens.

I just dont see the wage inflation or healthy jobs market that inflationists assume will occur as a sign of recovery. rather, i see inflationary pressures in food, energy, health care, metals, etc.. as a result of fed policy and a weakening dollar, and I see higher rates as an unintended consequence of actions taken to stem the crisis.

You can either view this as GOOD, and a sign that future growth will create these inflationary pressures, OR

You can believe this is occuring for BAD reasons, a side effect of everything done to prevent a systemic collapse and happening at same time that wages are declining and unemployment is rising and people got hit real bad by both stocks and housing. There are many more people in worse shape, than in better shape after the past 2-3 years, trust me. Wall street is totally changed - never will be the same. Cities are struggling and taxes will have to be raised.

I see this first wave of higher costs, higher rates, and higher taxes as crimping to growth and a squeeze to consumers. Others see it as a side effect of a growing economy. To grow, we need to add 150,000 jobs a month, consistently, every month, as a sign of a health economy. That is not happening, and defaults are spreading to higher quality debt classes.

If inflation comes in form of what I believe it will (dragging rates higher with it), while unemployment rises and no inflation shows up in wages, housing will be pressured.

It is very difficult to come up with an answer of what will happen to real estate when inflation hits without any other variables. Sure mortgage rates will go up forcing downward pressure on prices, but won't others run to safety? Also, what about those that locked in mortgages at 6% when prevailing rates are at 10%. Are they happy? Or would they have rather gotten in at the lower price with the higher mortgage?

Maybe, it usually depends what is forcing that inflation:

For those of you that have been living in NYC over the last decade, and think we have not had at least moderate inflation of 5-6% you are sleeping:

Housing Costs: Up over 100%
Food: Up About 35%
Cup of Coffee: Up 50%
Transportation Costs: Up Over 40% (do you recall each mass transit hike, how about bridges and tunnels)
Going to the Movies: Don't even get me started
Utility Costs: Ughhhh

I have lived in the city throughout the decade and can say without any pause that we have had some serious inflation. What kept housing going up in this environment is that we have had, alongside with expense related inflation, some serious income inflation related to just about every professional category, including of course, real estate brokers:) Not to mention the fact that it bumble Alabama, inflation was not existant, so on a national level mortgages had plenty of room to go down.

Anyway, point is don't talk inflation out of context. What is driving that inflation is key to answering the question about how real estate will react to it.

"Food: Up About 35%
Cup of Coffee: Up 50% "

In some cases, most of the increase can be attributed to increased RE costs.

actually, 30yrs, you should share your analysis here. increased real estate costs at the most basic level are passed on at the commercial/retail level, which in turn increase prices. which is why Starbucks fans, such as they are, might be happy to hear that the co feels that they can knock off 25% of rent costs in many markets.

but you might not be the beneficiary of such savings. shareholders might be.

It depends (duh). I'm not sure Starbucks is the best example, however: take a look at price differentials at Dunkin Donuts, which is a franchise operation and I think you'll be somewhat shocked.

Every weekend my wife goes to visit her friends in NJ and Westchester and when she comes home, she recites the prices of various groceries at the same chain supermarkets there vs the one's in our neighborhood. The differences are also quite astounding.

A friend who is a commercial litigator (one of the one's I get my law firm inside info from ) is also a huge foodie, so we're always having discussions about restaurants. At out usual Sunday brunch this week, the subject of the viability of many Manhattan restaurants came up, given that he has somewhat of an insider's line on a lot of private industry info. i was surprised to hear the list of of places which have been VERY successful over the past few years which are on the verge of going out. I made my pitch that it's all about the rent, etc. and how you just can't open a moderately priced restaurant in Manhattan these days, that a poll last week on NY! had over 50% of respondents saying the way they are coping with the economy was to cut out going out to eat ALTOGETHER, and that due to high rents restaurants could no longer make it on doing well on Thursday Friday and Saturday, but had to be busy 6 or 7 nights a week and the crowd who used to spend $70 a person on Monday, Tuesday, etc. doesn't really exist anymore, blah, blah, blah.

He pointed out that after many failed such places in The American Thread Building, Terrance Brennan had recently opened a spot which was busy every night of the week (practically). The discussion went further, though, that the place was much more moderately priced that most similar places which have opened in the past several years. he questioned if rent was forcing those places out, how could I explain this place. I immediately posited that as far as I knew, the owner of that space was the original developer of the building, who probably saw his cost basis as zero, and after going thru a number of rounds of "vacant 3 months, free rent for 3 months, pay for 3 months, eviction for 3 months" (which basically means that his 'real' rent was 75% less than the lease amount) he may have decided to do a strict percentage rent deal; and that it being Terrance Brennan, it would make sense because that's EXACTLY the type of guy you'd do a percentage rent deal with because given the opportunity to deliver lower cost, high quality food, he'd almost surely have a hit. It took my friend (who is probably the smartest guy I know) about three seconds to open his eyes really wide and exclaim "you're right!! that has to be it!". of course, neither of us know if that's it, but if anyone has any inside track on what that lease looks like, I'd REALLY love to know what the actual deal is.