Hyperinflation and Real Estate

[AroundTheWorld]

My research (very preliminary) shows that real estate is generally a good hedge against hyper-inflation.... (along with commodities, metals, etc.)

My question to all that are smarter in econ than I am...

If hyperinflation hits the US - - on the tails of the RE crash - - what will happen to Real Estate during that hyper inflationary period?

 

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[CactusWren]

It would go up in price to keep up with inflation.

 

[Russ H]

Here's the REAL $64,000,000,000 question:

If you're paying on a 30 year FIXED RATE mortgage, w/pre-inflationary rates-- WHAT HAPPENS?

I'd love to believe that my monthly payments would be the same as buying a loaf of bread, but I'm not naive enough to think that would happen!

I'm guessing the banks modify the loans, eh?

(seems kinda ironic, given that's what is happening the other way 'round right now).

-Russ H.

 

[hakrjak]

I'm with you Russ, feeling like the banks & government with find a way to screw us.... But we have a binding contract with them, and I've never seen any language in a mortgage that talks about inflation -- So we could hold them to it....

Problem being -- I'll bet they go crying to the US Government because they can't make enough money to stay afloat if this happens?

Cheers,

- Hakrjak

 

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[andviv]

check your note again... they have a clause in there to call the loan for pretty much any reason...

 

[AroundTheWorld]

If you're paying on a 30 year mortgage, w/pre-inflationary rates-- WHAT HAPPENS?


I'm guessing the banks modify the loans, eh?

YES!! I've been thinking along these exact lines.....

Would the banks really be allowed to modify these loans? Imagine the outcry if they did.

Very interesting indeed.

check your note again... they have a clause in there to call the loan for pretty much any reason...

Call the loan yes... but modify? At what point would they decide they are better off to call it?

 

[Russ H]

Hak-- You and I have different ways of looking at this. I don't see this as being screwed, just renegotiating a business deal. Same as if you ask your lender for loan modifications now.

ATW-- I'm thinking they'd call the loan, but offer to refi as an adjustable rate.

Thing is, it would still be a deal if you got your payment in 30 days after the billing.

******

Let me put a BIG thing in here:

If we truly have hyperinflation, we're gonna be in waaaaay more trouble than mortgages. We may have inflation-- even double digit inflation-- but hyper- inflation? 50%+ a month?

I'll deal w/it if it happens, but it's not part of our PLAN at this point.

Most logical answer, ATW, is to own a property free and clear, on a pc of land that is not taxed and shows no improvement or house on it, and have your water and elec off the grid, w/NO heat signature (e.g., a chimney). Grow your own food, pump the water, and pray your electric doesn't go down (or, have manual back ups). Note that you could also NOT own this remote prop, but just squat on it (definitely won't get taxed then).

Again, I'll work that angle if it comes to that. Otherwise, I'm not using any energy to PLAN for it at this point.

-Russ H.

 

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[Bilgefisher]

I agree the banks may call the note, but they will initially do so in a way that looks very enticing for folks. I'm not sure exactly what they will do to be honest, but it will be something to encourage folks to voluntarily change their loans. Perhaps similar to the cashout refi's we so over the past 8 years.

With everyone predicting major inflation over the next few years, is there anyway that it can be stopped or minimized?

 

[AroundTheWorld]

and... just like so many other things that have happened in our economy.... it is similar to boiling a frog. It's not like the banks have demonstrated that they are capable of knowing what is coming. Before we have hyperinflation, we would have inflation. Turning up the heat on the burners.

At what point would the banks wake up?

 

[Bilgefisher]

At what point would the banks wake up?

When they are allowed to fail. Darwinism in the financial world.

 

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[kidgas]

Here is an article about the hyperinflation that occurred in 1922-1923 in Germany. Please note toward the end of the article the discussion on performance of individual investment vehicles.

Hyperinflation in 1923 Germany

Essentially, you want to preserve capital/purchasing power. The ability to convert real property into the new currency of the realm is critical. This can be accomplished through real property, hard currency, personal property, select stocks. Paper (ie cash and bonds) becomes worthless.

 

[Russ H]

My grandparents moved out of Germany in the late 1920s. My Opa (grandpa) had told my mom about the crazy inflation, and what people did (You've all heard at least one of those stories: Guy brings a wheelbarrow full of cash to the bakery to buy a loaf of bread. When he opens the door of the bakery, someone steals his wheelbarrow-- and leaves the cash behind).

-Russ H.

 

[hakrjak]

How about equities? If hyper-inflation happens, wouldn't the price of stocks increase exponentially as well? And be a more liquid way to get at your money than Real Estate?

(I'm still wondering, if the price of my $100k house can be $1million in a month or so.... Who is going to have the $1 million to buy it? Aren't 99% of the average Joes going to still be earning their $30k a year paychecks!?) I find it hard to believe that companies would give people raises eagerly... And have never seen a company give raises enough to even cover cost of living increases in my lifetime, so would they give increases to cover hyperinflation? haha Not likely, right? -- Since the average person in this country is something like $12,000 in debt, and has no assets to speak of -- Anybody without assets would instantly become dirt poor, right? And you've instantly got a new poverty class that is much larger than the middle class or the upper class....

- Hakrjak

 

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[Russ H]

Hak-

Didja read the article?

It answers several of your questions.

-Russ H.

 

[AroundTheWorld]

Real Estate: Farmers and holders of urban property seemed to benefit if their property was mortgaged; the inflation soon wiped out the mortgage debt. However, they received no income, as noted above, since rents were frozen. After the stabilization, heavy new taxes and the urgent need for cash forced most holders to remortgage their property, often more heavily than originally, so that their gains were illusory. Still, those who held real estate throughout managed to save the capital thus invested. However, those who sold during the inflation (often through desperate need for cash) fared poorly. Because it brought no income, real estate sold at extremely low real price levels during inflation.

Seems that the government / banks didn't do much to call / re-write notes until the new currency was issued. What they did do was something that had not occurred to me.... freeze rents.

 

[hakrjak]

Hak-

Didja read the article?

It answers several of your questions.

-Russ H.

I did man, but I can't help notice that their site is using that article to help them sell gold coins... So I'm not sure how credible the article is -- Although very interesting. Also like the article sort of admits -- Pre WW2 Germany and modern day USA aren't exactly great comparison's since Germany was isolated like modern day Iran at the time, and the USA is still the leader of the free world with ties to just about every nation on the planet.

Cheers,

- Hakrjak

 

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[Russ H]

Good points, Hak-- any history we read at this point is going to be different circumstances-- this is new ground (and why so many "experts" don't know what to do next, and what will happen).

But reading the past does help get a feel for some of the things that *could* happen (or at least variations on that general theme) . . .

-Russ H.

 

[CactusWren]

This is not simple because we could well be talking about stagflation instead of hyperinflation.

Plus if Economics were a science the world would not be in the place it is right?

In a simply inflationary situation you do not want to hold cash. The more liquid the asset the more likely it is to loose value with inflation.

Now RE would then be considered "safer" because it holds its value or maintains it. It is not really going up in value because in reality one isn't actually necessarily gaining its just a safe haven. Under such conditions, the banks would not necessarily react and call their loans. Obviously, those loans that are adjustable could become a major nightmare...because the banks would definitely hike their rates under the same reasoning of "maintaining" their earnings. (I know of more than one horror story...)

On the macro side, under such a scenario the currency becomes devalued. Technically, that would encourage people to export because now they have more competitively priced goods which would begin balancing the equation.

The scary thing is that how long before we could really compete with China, India, etc. Not to mention how do you deal with the entitlement mentality...

Going back to the RE. This is just a safe haven. A good place to park your cash like many other hard assets. Does it make RE investing more profitable per se, I don't think so.

 

[Russ H]

Going back to the RE. This is just a safe haven. A good place to park your cash like many other hard assets. Does it make RE investing more profitable per se, I don't think so.

I was surprised to read what happened to owners of RE during the hyperinflation-- that they paid it off quickly, but soon lost it to meet basic needs (and that prices of RE did not inflate at the same rate).

Getting back to what was said before, being self sufficient and providing all of your own water/food/shelter seems to be a good hedge to me-- any thoughts on things I'm missing here?

-Russ H.

 

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[randallg99]

Getting back to what was said before, being self sufficient and providing all of your own water/food/shelter seems to be a good hedge to me-- any thoughts on things I'm missing here?

-Russ H.

just thinking that demand for food, shelter & healthcare become premiums and will challenge wallets justifying the demand for assets during hyperinflationary periods.

all costs associated with RE will hypothetically jump especially taxes.

 

[Russ H]

all costs associated with RE will hypothetically jump especially taxes.

True enough.

And if there are rent controls/caps, it gets nasty, fast.

So the solution goes back to squatting on someone else's land, in the middle of nowhere, and having no carbon or heat footprint.

What about an RV specifically set up to be off the grid? (composting toilet, solar cells, etc). Only thing you'd need is fresh water and land to grow food (or a giganourmous stockpile of MREs).

-Russ H.

 

[AroundTheWorld]

Why no chimney, Russ?

And.... If you are self sufficient - - - so that is your "hedge." Then, is it wiser to hold real estate and pay the debt w/ "pennies" or better to stay out of it completely?

 

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[Russ H]

Sonya-

We're just talking hypotheticals here.

Any police or ag enforcement can see a heat signature from satellite photos-- and nail you for squatting (or seek you out for other things).

You know I'd prefer to own the RE-- but the taxes might be a million dollars a year (say, 100x as much as the price of bread). If you're truly unplugged, you won't have this kind of $$ (b/c you're out of the system)-- so you wind up losing the prop to foreclosure for back taxes.

At least this is what has happened to others in past times of hyperinflation.

Perhaps one person finds a job, just to earn money to pay the prop tax, and the rest of the family works to make food?

Again, just hyphotheticals. But a fun exercise-- not the usual direction my brain goes.

An alternate question: Instead of surviving, I'll ask a different question:

Who were the rich people in depressions and times of hyperinflation? What did that have/do to make it through riding high?

I know that celebs did well (they had jobs and were paid well). Other options/approaches?

-Russ H.

 

[kidgas]

It is actually difficult to get a sense of what truly has happened to real estate in a historical setting during a hyperinflationary environment. Most discussions of hyperinflation inevitably lead back to gold and silver.

From Wikipedia, a general article on hyperinflation:
Hyperinflation - Wikipedia, the free encyclopedia
Note the examples of hyperinflation at the end of the article. Many different countries have undergone this and have survived.

This from another "gold bug" site:
Is Real Estate a Good Hedge Against Hyperinflation?

Comments about Vietnam:
How Vietnam is Coping with Hyper-Inflation -- Seeking Alpha

Obviously there are many other sites with similar commentaries. I think the best plan of action is to be appropriately diversified in the event of such a calamatous time holding onto some hard assets, real estate, food, bottled water. Maintaining the ability to adapt and survive would be useful as well whether that is in rural areas, becoming adept at bartering, moving to another location, hunting & gathering...whatever. Obviously anything you have can be taken from you by government, lawlessness, etc. Not a pleasant thought.

Interesting discussion.

 

[biophase]

Found the article very interesting and learned a bunch of things that I hadn't thought of before.

Let me see if I understand this. Let's assume I borrow $10,000 today and buy 5,000 cans of chicken soup at $2. Hyper-Inflation causes these cans to become worth $4 a can within 30 days. I sell 2500 cans at $4 and pay off my $10,000 debt and I'm left with 2500 cans for free. At this point, it would be silly to sell your 2500 cans. I would store these somewhere. Then I would go back to the bank and borrow $20,000 to buy some gasoline, bricks, ammo, etc...

My take on this, is that you should be borrowing money and using it to purchase products that can produce assets. Assets being fuel, food, shelter and arms. As Russ said, you need to become self sufficient in some respects. If you are able to make one hard asset that people need, then you can use it to barter for other assets.

You may not be able to make gasoline, but if you can make vegetables, you can trade it to the guy who makes gasoline.

 

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[MonTexan]

Last October I read two interesting books that were fairly insightful about our current economic situation and discussed inflation in great detail. They were: “The Coming Economic Collapse†by Stephen Leeb and “The Little Book of Bull Moves in Bear Makets†by Peter Schiff. Below is a summary of the notes I took while reading these two books. While not exactly addressing the concerns of “hyperinflation,†they may help us understand what could be headed our way. I am by no means an expert on inflation, so follow-up questions are best directed to google. :smx9:

General notes on inflation:
•

​

The rate of inflation is calculated based on a fixed basket of goods at a 1982 value of $100. It is “conservatively calculated†because it hasn’t taken into account the inflated values of residential real estate since they use “owner equivalent rent†in the calculation. In allowing practically everyone to qualify for mortgages, rents in many places were effectively lowered thus keeping the CPI (consumer price index) artificially low. (looks like this is currently reversing course)
• Rising oil prices, economic growth, and increased government spending result in inflation….oil prices certainly have room to go higher from here and the US gov’t is certainly keeping those printing presses running to fund the various bailouts.
• From the great depression, the US gov’t learned the best way to deal with economic slowdown is to stimulate growth with a fast infusion of cash
o The gov’t infuses cash by lowering interest rates, increasing spending, or lowering taxes….all of which appears to be happening now!
o If the economy then grows too quickly, causing inflation, the gov’t will raise interest rates and lower spending…this may be impossible because of current debt levels.
o When inflation hits, the gov’t will have two options: either fight inflation by choking growth and risking a deeper recession or continue to stimulate growth and allow inflation to reach double digits
• In the 1970’s, the US gov’t chose to fight inflation. They brought inflation under control by curtailing growth (rising interest rates far above the level of inflation)
o This tactic could be much more troublesome today because of our highly-leveraged society. A large percentage of consumer debt is secured by homes….housing prices could get crushed even further.
• Long-term interest rates are still artificially low, meaning bond prices are artificially high. Bonds may be the next bubble to pop. (I think the Oracle of Omaha made a similar comment recently).
• Additional “economic stimulus†packages by the gov’t only means more $$ chasing a given supply of goods = inflation
• The US gov’t stopped making public it money printing activities in 2006 with the creation of the “M3.†This prevents analysts from using the knowledge to figure the amount of inflation being created.
• Since inflation is difficult to quantify, we must compare changes in nominal prices to price changes in gold. Ratios representing these relationships can be a good guide (see below)
• The continued recession and coming inflation will require a non-traditional investment approach…get out of the US dollar and into commodities, precious metals, and foreign equities whose currencies are appreciating against the US dollar. Cash not needed in an emergency fund should be placed in a non-dollar money market fund.
What if home prices fell?? (one of the most interesting parts of the Leeb book because the events are currently playing out)
• Massive amounts of gov’t intervention would be required (happening now)
• There would be record levels of unemployment (evidently on the rise)
• Interest rates would go to zero (basically there now)
• The economy would emerge with much higher debt levels than before (that’s scary)
• Oil prices would decline temporarily (they have)
• Unable to fight inflation, the gov’t will put all efforts into keeping the economy growing so that wages rise faster than interest rates and debt doesn’t overwhelm Joe-the-plumber….they will have to let inflation go crazy!
TIPS – Treasury Inflation Protected Securities:
• Often said to be a safe haven against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index (CPI). When the TIPS matures, you are paid the adjusted principal or original principal, whichever is greater (ie. your principal is guaranteed). TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation.
• It is best to hold TIPS in a tax deferred account because inflation adjustments (increases in principal) are taxed in the year they occur even though you don’t get the $$ until maturity.
• Inflation-linked municipal bonds offer additional tax exemption and may be better than regular TIPS for people in higher tax brackets
• Investing in non-currency-hedged foreign bond funds will protect against both inflation and a falling U.S. dollar
• The gov’t has many incentives to under-report the real levels of inflation. This is problematic for an owner of TIPS because their return is directly related to the flawed calculation of CPI. When asset prices are lifted by inflation, the effect is not included in the CPI or PPI indices used by the gov’t to measure it! Other issues impacting the CPI calculation include the notion of “owner equivalent rent†and creation of the “M3†as discussed above. The CPI currently shows inflation at 4% while Mr. Schiff suggests it’s really at 8-10%.
Gold and other precious metals:
• The DOW was worth 20 oz of gold in both 1929 and 1980. The recent bear market began with the DOW priced at 43 oz of gold…and it’s now worth less than 9 oz of gold! Despite rising from 380 in 1929 to 11,000 recently, the DOW has actually lost half its real value over the past 80 years.
• There is much more leverage in precious metals stocks than in the metals themselves. In 1980, gold and precious metals stocks made up 7% of the S&P 500’s market cap. Today is makes up less than 1%...if investors increased their allocation to 5% of the total capitalization; it could mean a 5-fold increase in precious metals stocks.
• Gold bullion preserves wealth, avoids risk, and maintains liquidity but does not grow wealth. Rather than going up, it holds its value as fiat currencies lose theirs.
• In 1933 President Roosevelt issued an order confiscating gold bullion, but the order did not extend to private ownership of shares in gold mining companies. Gold stocks soared during the great depression. Also, in the 1973-74 bear market, stocks dropped by 50% while gold mining stocks quadrupled.

Hope these notes are helpful to you.

 

[CactusWren]

Thanks for the notes Montexan speed +

 

[EdmontonShaz]

In the early 1980's Canada had a prime rate just over 22%. At that time in Alberta (where I am), buildings that were listed for sale or had mortgage renewals at that time were being sold for pennies on the dollar because of the large payment incurred from this higher interest rate.

What does this have to do with hyper inflation? Well, the prime rate is usually put into place to stimulate the economy to allow inflation around 2-3%. In periods where inflation is above the norm required by the government, the government raises the prime rate to curb the "overspending" that is occuring.

So, if inflation is at 50%+, the only hope the government would have would be to raise the prime rate in tandem with it - possibly over the 60% rate that most governments have inshrined as the legal limit of reasonable interest. (In Canada, it's 62% compounded annually).

Personally, I believe that as the US economy grows out of this recession the prime rate will climb to double digits - possibly as high as 16% to ensure that hyper inflation does not take hold. Even if the prime rate goes to 8%, which is considered a historical standard or "average" rate, imagine the damage that will be done to purchasing power as compared against the rates right now.

But, at the end of the day - who really knows what will happen?

Shaz

 

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