Being in cash is one of the biggest risks out there...

i would amend that to being in long term bonds is a big risk --- cash can take advantage of rapid rises in short term interest rates which are a necessary result of signficant inflation.

meanwhile, the problem seems to be the exact oppposite.

Take a look at Bloomberg. There was an article about the Gov buying Treasury bonds which in turn will make them not inclined to increase interest rates since their debt service portion will increase. You must be the first person I've heard saying that cash is good in an inflationary environment.

tell me again the evidence that you see that we are in an inflationary environment.

Obviously not now, columbiacounty. No one says that. We are talking a couple of years out.

2009-2010 - Another bought with deflation risk first
2011 on - Major inflation, but the case that real estate is an effective hedge against inflation is questionable.

It's good enough as a hedge.

uppereast, I agree with you 100% and am in the same situation.

I want to buy before inflation really sets in, which is definetly coming and big time.

But I find the condos I am interested in are overpriced by around 25%. Not trying to time the market to the bottom, but definetly want a good value given the current conditions. Do you think prices will fall come the summer if demand remains stagnant?

"Being in cash is one of the biggest risks out there, due to the danger of rising inflation in the next two years, warns John Bollinger, founder of BollingerBands.com."

I can buy this. But how you go from that to putting that hard earned cash into a declining asset is just plain silly. If you want to protect against inflation, buy tips. if you are worried about the USD, then buy gold or foreign sovereign bonds. Or for that matter, foreign currency/money markets. But hey, it's your money.

nostreet, I am bidding on apt with reasonable bids but so far no one has accepted. I will see how it goes going into the summer.

special_K, I don't think the downside is that big any more. Feel like a lot of pain has been priced in already. Having said that, I don't bid full ask on apt. Also, don't want to put multiple millions into gold/TIPS. What if I am wrong then? If I am wrong with the apt, for me it's still a place I want to live in until my kids are grown up (which is quite some time).

uppereast, if you don't mind me asking, are you bidding on anticipating further declines in real estate value? If so, what do you consider reasonable offers (% of the ask)?

Do you think some sellers are also very much aware of the pending future inflation and that's why they're being firmer with their prices?

It's becoming very frustrating... do you think there is a window that is best to strike? I was thinking that come July there will be another reality of the necessary price drops, but it's just a guess.

"Being in cash is one of the biggest risks out there, due to the danger of rising inflation in the next two years, warns John Bollinger, founder of BollingerBands.com."

That's why you should be in Gold or TIPS.

"This is why I am currently looking to buy. Unfortunately, the two bids we made were turned down."

Horrible strategy. The analysis that housing prices will rebound on the landscape of rising inflation is flawed because housing was a mega-bubble that just burst. It will not rise quickly like other asset classes which weren't in a bubble but were dragged down by the specter of dis-inflation (or deflation as some would argue).

But, if you really want to own, nobody is stopping you. That's your personal choice- just don't call it an investment strategy due to potential inflation risks.

There's a few reasons to think this decline goes on longer without a defined bottom:

1) 18-24 month lag to the rest of the country
2) Momentum
3) Regulatory/populist attacks on Wall St. compensation
4) We're not that close to rent/buy parity or asset/income historical ratios
5) Rising tax rates, to an extent higher than suburbs/other parts of country

You should be looking for secondary signs of a bottom instead of guessing what the right price level is since a correction can go well-past the "right level"

1) Rising volume
2) Inventory that stops going up (no sign of that yet)
3) The dollar starting to fall again to put a heartbeat back into foreigner affordability
4) Unemployment starts going down or at least stops going up

totally agree with MMAfia...its like you are forgetting WHERE HOUSING CAME FROM, where it is now, and what system of credit ALLOWED it to get there, yet is no longer there and wont be for a loooooong while.

Amazing that people think if inflation hits, housing will just pop back up again regardless of where we came from or what the new system of credit (debt markets, securitization, etc) may look like.

If you assume bollinger is correct and inflation is a serious problem then the Fed would be raising interest rates. At present deflation is the threat. The Fed is currently buying MBS to keep mortgage rates artificially low in order to counteract the housing market deflation. Under a scenario of rising inflation the Fed will hike the funds rate and may even sell MBS to drain liquidity from the banking system in order to supress infaltion. Interest rates will move sharply higher. The sames forces that are keeping mortgage rates artificially low today may force them artificially higher if the economy were facing inflation risks.

Re-run the mortgage calculator with interest rates 200 basis points higher and see how much less house one can afford. That's about the difference between today's rates and where they were last September. A 2% rise in 10-year yields and in mortgage rates as a consequence translates into a mortgage balance that is roughly 20% less. And that means 20% less buying power. Only if incomes were to jump 20% will prices maintain equilibrium. If incomes do not go up (if you work in any area finance related in nyc incomes not only are not going up they are going down - just ask the new york state tax authorities) then property prices must correct downward by 20%.

Only if incomes were inflating faster than the general price level would inflation be good for residential real estate.

spot on

It is an interesting argument but I think it oversimplifies the situation for several reasons. Jake and MMafia have already cited some of them. A couple of additional points:

1. the rental market is sagging with the ownership market. to the extent there will be any stoppage of price declines in NYC (let alone stabilization), we would need to see job and wage growth in the area. Assuming this happens at the same time as inflation, the rental market would likely go up sooner than that market to own. Therefore if your concern is hedging against inflation risk you would probably be better off investing in apartment REITs and moving to ownership later.

2. In buying property you are not just hedging your cash but incurring debt. This brings its own problems in an inflationary environment since everything else would go up but your salary may not -- result it less avaiable cash for debt service.

In short, it is a lot more complicated. On top of that you have already said you don't believe it will happen in the short term and I don't see anything else driving real estate purchase other than price cuts until then.

Where do you all find the time for this?

So does this mean the mantra for the summer/fall of '09 will be "buy now or hyper-inflation will wipe out your savings"? Is this the end of "buy now or be priced out forever"? I see this as kind of a sea-change. Brokers are seriously going after cash buyers as the credit lines extended to debtors are being shut down.

We're coming to the end of a period where home values rose 300% or more. Much faster than wages. Isn't there more inflationary risk in buying real estate at the currently inflated prices than in holding cash?

And brokers who pose as buyers. "But I'm in a rush to buy (although all indicators point to properties declining in value for years)...
a) because I don't want to move twice
b) because hyperinflation is almost here
c) because I need to have my dream apartment and somebody will snatch it from me
d) Because Mexicans are going to prop up the market (I actually read this one in Curbed) you know, they get paid in cash
e) because any decent 2 Br was already over 1M by 2003-04 (LICC ditto)
f) because your rent is going to go up

You may be right, uppereast. May I make a suggestion that may solve some of your problem? Buy my apartment. I'll take your cash so you don't have to take that RISK.

There is not going to be massive inflation anytime in the future. Please, do yourselves a favor and turn off Peter Schiff right now. If Schiff's inflation predictiosn are as accurate as 99% of his other predictions, then we should be in a deflationary period for quite some time.

"Being in cash is one of the biggest risks out there, due to the danger of rising inflation in the next two years, warns John Bollinger, founder of BollingerBands.com."

really?

how does that compare to losing your job, taking a big pay cut, losing even more money in your 401K? making a mistake on a multi million dollar real estate purchase that drops another 25%?

I got it...invest in frozen concentrated orange juice, right uppereast?

"There is not going to be massive inflation anytime in the future."

alpine292, that is a very surprising statement coming out of you. forgetting about Schiff, it is understood that this is the last chapter in the book. we will end up with inflation. lots of it. it is in fact exactly what the governments of the world want.

the debate is about the chapters in between before the end of the book. dis-inflation? deflation? stagflation?

cash has been one of the best performing assets over the past 10 years.

for the 47th time....

i certainly understand why inflation would ease the national debt problem (while creating all sorts of other problems) but I still don't understand how inflation can take hold in a world lacking demand with tremendous unused production capacity.

Agree thaty inflationary pressures are minimal, especially with the recent sharp fall off in commodity prices (especially energy), the fourth year of a housing recession, rising unemployment and the sharp fall-off in consumer spending (which represents 75% of the US economy.) As noted by a previous poster, if inflation was seen as imminent, the Fed would tighten monetary policy and there would not be widespread concern about falling real estate prices in Manhattan.

Just another voice, but it seems to me 1) Manhattan (and say Brooklyn) real estate in particular is only now starting to shift to a post-bubble level, and the just starting economic impact of the recession and the permanent downsizing of the finance industry, all mean that the potential for downside is far greater than for upside, I think most market observers would agree; 2) even if inflation takes off, which I personally think is inevitable, it may well occur with lower economic growth, and continued burst bubbles of real estate in many areas of the country; 3) I agree with those pointing out that the truly bubble-bubble-bubble nature of manhat wacko prices means that a lot of bursting need to take place before prices have re-set, regardless of inflation

10% unemploment, retail sales tanking, housing tsunami, etc.
it will take more than 2 years to get this economy rolling again - make that walking again.
Inflation is not a problem for a while and I mean years
The de-leveraging process has just started, much more to come

The inflation argument is obviously based in the unprecedented expansion of federal govt borrowing. And, if the recession is long and deep and long and deep, then the government will borrow/print more and inflation will at some point result. I'm no economist, but that worry seems sensible to me.

sorry....but that's kinda like

breaking down in your car in the middle of winter, in the middle of nowhere and worrying about the 50,000 mile tune up

seems like you gotta get the car running and worry about that tune up later

I still say, Frozen Concentrated Orange Juice

FULL DISCLOSURE: I am Executive Techno-Douche of a frozen concentrated OJ factory in Florida...don't call me Phil

you know what i'm talking about

Considering that HOUSING is a HUGE chunk of the CPI, and its still dropping.... not really sure where folks are getting the inflation idea from...

And, if its inflation you are worried about, buy TIPS.

Inflation doesn't make a lousy investment a good investment.