I'm talking anyway !

Real Estate Agent with We Know Urban Realty

A friend has strongly suggested that I NOT write about what you're about to read, the possibility of higher interest rates and/or inflation in the near future.  His reasoning is that by discussing such topics I might A) confuse folks unnecessarily and/or B) discredit myself in the event that neither (i.e. higher interest rates or inflation) come to pass. 

It's probably good advise but I'm going to ignore it.

Although it is true that we do not know for sure whether or not interest rates will go up or if we will experience inflation anytime soon I personally believe we are heading that way.

Should this inhibit you from buying today?  No, just the opposite and here's why.

Interest Rates - If you buy property today and lock in a loan with a 5% interest rate then you are taking advantage of some of the lowest interest rates in the history of modern lending.  Folks, these are great rates.  And IF interest rates go up, your rate won't change.  So, IF rates go up to 8%, 9%, 10% or more you'll be sitting pretty.

Also, let's say you have "x" amount to spend each month on a mortgage payment.  If you buy today and take advantage of the low rates then less of your monthly payment goes towards interest and more of your monthly payment goes toward the condo itself.  In other words you'll buy more condo for the same amount of money.

Inflation - If we experience double digit inflation (10% or higher) you would be wise to have taken advantage of today's real estate prices rather than waiting.

With inflation, the value of a dollar goes down.  So if it costs $1 to buy a loaf of bread today, it will cost $1.10 to buy a loaf of bread during an inflationary period of 10% because the bread will be worth more relative to the less valuable dollar.  This may not seem like a big deal because the loaf of bread only went up ten cents.  But this is also true for real estate.  So in the same scenario a cool loft condo that costs $250,000 today would cost $275,000 a year from now!  It will cost this much more simply because the dollar will be worth 10% less than a year before.  So, during inflationary periods, while your dollars go down in value, real estate and many commodities (food, fuel, energy, precious metals, etc...) go up.  With real estate, the value of your money is "preserved" but with cash the value of your money is lost.

BONUS, The Power of Leverage - Now, let's say you buy the $250,000 condo referenced above and get an 80% loan to do so.  In other words you come in with $50,000 cash for the down payment and borrow $200,000.  During a 10% inflationary period the property could be worth $275,000 a year after you bought it; $25,000 more than you paid.  And remember that you only spent $50,000 to enjoy that $25,000 gain!  So while folks who did not buy are losing 10% on their money every year, you'll be enjoying 50% growth thanks to leverage!!

DOUBLE BONUS - Paying Back With "Cheaper" Dollars - Finally, if the value of the dollar is lower because of inflation AND you have a fixed rate mortgage, then you are paying the bank back with "cheaper" dollars.  As we saw above, it might cost $1 to buy a loaf of bread today but during 10% inflation that same loaf will cost $1.10 because the dollar is not as valuable as it was a year earlier.  So, when you make a mortgage payment during 10% inflation, those dollars are worth 10% less than they were a year before; you'll make money on the bank's money!

Like I said above, no one knows for sure whether or not interest rates will go up or if we will experience high levels of inflation.  However, with interest rates being soooo low, it only makes sense that they will go up.  Remember, interest rates in the early 1980's were in the very high teens, yeah like 18%!!!  Folks, if you can borrow today at 5.25% or less then DO IT!  If we do get hit with inflation then you'll be really glad you bought today rather than later.  The number of homes and condos selling in Phoenix and surrounding cities are up, prices appear to have leveled off, there are fantastic foreclosure deals out there, there are still significant tax credits for some buyers, there are still tax benefits to owning real estate and IF interest rates and/or inflation kick in, those who buy now will be glad they did.

I do not want to sound like one of those rosy and cheery Realtors who ooze "good" news and only good news.  I have written plenty of blog posts about the problems in real estate.  However, I do believe in the fundamentals of economics and when the market starts "making sense" I am not afraid to discuss that too.  Real estate is beginning to make sense again.  Call us at We Know Urban Realty to learn where we believe are the best deals and why.

Comments (2)

Eddie Matthew
Zenith Realty - Perry Hall, MD

It was smart to talk.  Your message is straightforward and logical.  It would be difficult for interest rates to go any lower, but, indeed, they could rise.

Mar 03, 2010 03:42 AM
Jon Budish
Resident Realty - Fort Collins, CO

During the miserable "Carter" administration years we had double digit inflation. I bought a house at the time paying about 14% interest rate. It was attractive because it was priced low due to the lack of buyer demand because of the interest rates. I later refinanced of course.

Mar 03, 2010 03:46 AM