Whether one believes annual government statistics which allege 3% to 4% annual rates of inflation or if one chooses to take a closer look at the costs for their goods and services in real life which seem to increase in price closer to 8% to 10% + each and every single year, I do know that the cost of gasoline, food, water, and utilities has skyrocketed in recent years thanks to our weakening U.S. Dollar.
Historically, real estate has been one of the best forms of investments to counteract or to benefit from high rates of inflation. Traditionally though, when inflation rates are high, then the Federal Reserve typically likes to increase interest rates in order to potentially offset or slowdown high rates of inflation. On the other hand, low rates of inflation may then lead to lower interest rates. Today in 2013, we have both record low interest rates and increasing inflation.
Historical U.S. Median Home Sales Prices: The Past 50 Years
According to data published by the U.S. Census Bureau, the median priced U.S. home back in January of 1963 sold was just $17,200. Ten years later in January 1973, the median U.S. home was still a quite low $29,900. Twenty years later in January 1983, the median U.S. home price increased significantly to $73,500.
Thirty years after the original 1963 date, the median U.S. home price finally crossed the $100,000 threshold level as it reached $118,000 in January of 1993. Forty years after the 1963 date was reached in January of 2003, the median U.S. home price reached $181,700.
Today in 2013, which is fifty (50) years after the original 1963 year used in my study for this article, the median U.S. home sales price reached $170,600 (according to the National Association of Realtors). Sadly, the median U.S. home sales price in 2013 is below the median home sales price of ten years ago (2003 - $181,700).
“Upside Down” or Ride The Inflation “Wave” Again
Numerous housing studies on “upside down” properties note that people are more likely to walk away from their home when their existing mortgage debt exceeds their current market value. Whether an “upside down” or overindebted homeowner tries to use a “Strategic Default”, a “Short Sale”, or a conventional home sale, the owner may not financially benefit, regardless. As a result, neighboring homes may be adversely impacted by another distressed foreclosure sale in the neighborhood.
Question: What is one of the best ways to improve the value of real estate than by using national economic and financial strategies to increase property values? Answer: INFLATION. When home values increase, then existing homeowners have more incentive to stay with their properties. If less people choose to allow their lenders to foreclose upon them, then less foreclosures means better overall home values for each and every neighborhood nationwide.
A combination of record low interest rates and more access to government backed mortgage loans such as FHA will also allow more borrowers to qualify for larger loan amounts. Obviously, a borrower who qualifies for a $200,000 mortgage loan today based upon interest rates in the high 3% range might have only qualified for $150,000 at a 5% or 6% rate range in recent years.
The more borrowers who qualify for larger loan amounts will then drive up home sales prices for the existing homeowners. For the bulk of Americans, their net worth is derived from their ownership of real estate. If home prices increase, then property owners tend to get happier and then spend more money on other consumer items which stimulates the overall U.S. economy.
“Inflate or Die”
As I have written before, the Federal Reserve and U.S. government have tried to stimulate the U.S. economy by flooding the markets with cheap money so that they, and U.S. consumers, may invest in more stocks, bonds, real estate (properties and mortgages), and other assets in order to try to inflate our way out of this financial mess, or “Credit Crisis”, which officially began back in the Summer of 2007.
Since bank savings rates today offer customers effectively NEGATIVE NET RETURNS after one factors in the costs of taxes, inflation, and bank fees, then the higher returns offered in the stock market and real estate properties today seems much more appealing. The recent 14,500+ Dow Jones index levels are a testament to the success of that strategy of “Quantitative Easing” (create money out of thin air in order to buy assets), “Operation Twist” (drive interest rates even lower), and other types of intentional rigging and manipulation of the financial markets.
Since last year, we have seen how home prices have begun to increase once again due to the combination of record low interest rates, home listing inventory levels down near nineteen (19) year lows, and investors looking to earn decent yields well over their negative net returns offered by their local banks’ savings accounts.
In many regions of the U.S. such as the “Bubble” states of California, Nevada, and Arizona, home prices have increased between 5% and 20% in just the period of one year due to increasing demand for homes, and a decreasing supply of available homes for sale on the MLS (Multiple Listing Service).
Nationally, the median U.S. home sales price increased 5.9% between the end of 2011 and the end of 2012. This 5.9% home appreciation figure in 2012 was the largest home price increase since August of 2006. Historically, U.S. homes have increased an average of about 3% per year so the 2012 median price increase was almost double the typical annual home inflation rate.
Today’s bidding wars on numerous properties for sale, due to the unusually low home listing supply, and continued record low interest rates have continued to drive home prices higher in 2013.
As long as rates and home listing supplies remain low, then we should hopefully just yet inflate our way out of the financial mess one way or another. Don’t be surprised to see 2013’s home appreciation gains possibly even exceeding 2012’s numbers!!!
The U.S. economy needs a healthy housing market in order to get back on track so let’s all hope and pray for continued positive news for the real estate and financial markets.
To read the original published version of this same article on CRE (Creative Real Estate) Online, please click on this link here: