Most economists, government officials, investors and the general public are normally concerned about our prospects for either deflation or inflation, although most of the time inflation has been the central issue. This is because as the Economy heats up, prices rise. The Government (led by the Federal Reserve) raises interest rates, in order to slow the Economy and reduce the ensuing inflation.
Make no mistake, serious inflation is coming in the next year or two. Statistics published by the Government might not report the real inflation, but if you follow the coming home, auto, energy, and consumer retail price increases, the true inflation will be very clear to the sophisticated investor.
Why is inflation a given? Well, we can expect the Economy to self correct and start improving later this year. When it does, there will be a natural price increase pressure on the products, such as homes, autos, energy, and retail services to recover part of their price devaluation during the past three years. Add to this the fact that the national debt, currently at about $12 Trillion is going to be increasing by perhaps $2 Trillion this year, and at least $9 Trillion over the next 8 years (as reported by the Government). The interest cost of this money plus the very fact that this money also has to be raised in domestic and foreign markets will put tremendous pressure, when combined with expanding industry needs, on the $Dollar and interest rates. The result is obviously rapidly increasing prices in order to compensate for the increasing cost of money.
Some investors suggest that we shouldn’t invest in anything based on the above mentioned obvious facts. They are dead wrong because there is an opposite side to this equation. That is, with the coming inflation, wages are likely to increase as well. The Government is suggesting raising the Minimum Wage to $9 per hour. This is just a start, but what it means is that the least skilled and experienced person will earn about $20,000/year. Those with some experience will probably be earning in the $40-50,000 per year range. College graduates could by earning $75,000 per year or more. What does this mean for the housing industry?
Considering the fact that the typical family spends about 40% of gross income on housing, it would not be unreasonable to expect the college graduate wage earner to carry a $250,000 mortgage, or in other words, a home valued at $275-300,000. And, this is just with a single wage earner family. As we know, most families today, out of necessity, are two wage earner families.
The main point is that with the average home price today of about $ 150,000, inflation is going to make a handsome profit for those investors who have acquired property at the right price, in the right areas, and under the right conditions. All we need to do, as investors, is buy right, and have substantial financing, where the lender is absorbing the cost of inflation, and we are riding the inflation wave.
The main issue for us at the Fischer Investment Group is to insure that we have bought for us and our investors the right, New Residential Property, and have negotiated the right price. The right price for us is a calculation of what it would cost to replace desirable new property under Depression-like pricing conditions. In this way, our investment is relatively secure. Our exposure to potential negative market price fluctuation is minimized, and we stand ready to recover the full benefits from the coming inflation.
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