Rob's Rant

Open up any official history of our country and you will find reference to the fact that the Federal Reserve, under the wise tutelage of Chairman Paul Volcker, raised interest rates to record levels and broke the back of Inflation.  Since that time, we are told, we have experienced moderate to low levels of Inflation, and the horrors of the 1970s have been averted.

How true is this version of events?

Here is a chart, published by the Federal Reserve, showing the Consumer Price Index, seasonally adjusted:

Take close notice of the period from 1970 - 1980, when we experienced "high" Inflation, vs. the period from 1982 - present, when we have been experiencing "moderate to low" Inflation.  Notice any difference?  Neither do I.

This tells us Inflation is here to stay, until/unless the United States gets serious about its currency and backs it with something.  That could happen soon, or it may be many years from now.  Either way, you need to consider protecting yourself and your family from this loss of purchasing power in the meantime.

Traditional Inflation hedges include: commodities (oil, natural gas, food, precious metals) and real estate.  We are currently watching the unwinding of some folks' heavy bets into real estate.  It will be a long time before people who purchased real property during the "boom" will come out ahead. 

There are some factors going on in the current housing market that tell me it may be time to take another look at diving into real estate as an investment:

(1) It now costs more to build a home (at least here in Metro Phoenix) than it does to buy one.  So buying now will get you the thing below what Adam Smith called the "natural price".

(2) There has been a wave of Foreclosures, and more are to come.  While that could further depress the sales prices, there is a point where we cannot go much lower.  See #1.  All these people who used to own homes will have to live somewhere.  I can tell you they will not be getting another mortgage for a minimum of 3 years.  Therefore they will have to rent.  Watch for Demand for rentals go up, therefore driving rents up (when Demand rises, so do prices).

(3) The Federal Reserve is currently doing all it can to keep mortgage rates low and incent people to buy.  Eventually those rates will have to go up--possibly very significantly.  (In 1981, 30-Year Fixed rate was 18.45%.  Source: http://research.stlouisfed.org/fred2/data/MORTG.txt).  If you own real estate at 5% or 6%, and your neighbors are at 12% or 13%, you can either (a) charge lower rents or (b) make bigger profits.

Should you sink all your money into real estate?  Of course not.  But it may be time to consider adding rental real estate to your mix of investments.  And the lesson from the crash?  If it doesn't cashflow, don't buy it.  The mistake the majority of rookie landlords was buying properties on which they were taking a monthly LOSS, and speculating on being able to "flip" the property later.  Like anything else, in real estate, "bears get fed, bulls get fed, pigs get slaughtered".  This may very well be an excellent time to get into this market, so long as you avoid the temptation to be greedy.