Matthew Ferrara, Philosopher

Sex, Lies and Real Estate

Start buying all the real estate in sight – before your money won’t be able to buy any real estate for years to come.

Ok, we’ll admit that the “sex” part of our title was just to get your attention. But give us five minutes and it might be worth it.

Because real estate is about to become the best investment for the next decade, maybe more.

Why? Because the is about to compound two lies that will otherwise undermine the middle class – and the lower classes hoping to become middle class – for a good long time. Those lies are:

  1. We’re (almost) suffering from deflation. It’s simply not true. This tall tale is the product of voodoo (remember that?) which allows the government to say inflation is low – and falling – by calculating the aggregate inflation rate of a bunch of goods that almost nobody buys at the same time. The Consumer Price Index taken as a whole is meaningless; it’s only when you look at the individual parts that the prices have any meaning: Except that the government usually “subtracts out” the cost trends of food and energy when it reports that prices are “falling” – ie., deflation. Ask anybody who buys milk, electricity or gasoline if he thinks he’s suffering from deflation.
  2. A little inflation is good for the economy. Absolutely wrong. Inflation is bad. Period. It destroys the value of money that’s being saved, making those savings worth less (literally) toward investment in job and wealth producing activities. Put it more simply: Find anyone who lived through the 1970s and early 1980s and ask them what they think about inflation. Yet the Federal Reserve Chairman actually things we need to “add” some inflation to the economy. In other words, he thinks we can get out of a recession by forcing everyone to pay more for goods and services. This is the strategy? The Federal Reserve system was invented in 1913 to protect the purchasing power and stability of the currency, not deliberately undermine it. Of course, the Fed Chairman is only calling for a “little” inflation – 2 % – but that’s actually 22%  compounded over the next decade, as Henry Kaufman points out in the Wall Street Journal.

Which brings us  to real estate.

The commodities market is already signalling worries about the future value of money. Gold’s recent run up is only one indicator. Meanwhile, consumers who have done the hard word of deleveraging their cash flow in the last three years can’t expect to hold onto that money, because the Fed plans to make 1 in 5 dollars evaporate all by itself. So corporate and consumer money that’s been sitting on the sidelines needs to get to work – today – and that means looking for investments that can actually benefit from future potential inflation.

And that means real estate.

For simple buy-low, sell-high, there’s never been a better point in American history to buy real estate (ok, maybe the purchase of Manhattan for a few pearls, but you get the point). Buying low today offers the chance to sell it high when the next bubble – a printed-money inflation one, not a credit-lending one – inevitably forms. Then there’s rental property: Rental income rises with inflation, another way to help today’s money keep pace with increasing inflation cost curves. Even if you’re not inclined to manage property directly, real estate investment trusts (REITs) offer an arms-length play in the rental income space, especially commercial leasing. Somebody is going to have to lease supermarket space to store bread for the future breadlines, right?

Milton Friedman once said that if the government were put in charge of the desert, within a few short years there’d be a shortage of sand. The government is in charge of the money supply and inflation rate. The shortage it will cause by creating more sand – printing more dollars – will be it’s purchasing power.

Even marginal future gains in real estate is better than letting 1 in 5 of your dollars evaporate in the bank. Inflation is just another attempt by government to get you to spend, rather than save, your money. A bad, surreptitious stimulus plan. So look again at real estate, before your cash becomes not worth holding. Transform it into an asset with the potential to benefit from the inflation that is not just coming: It’s already here.

  • Matt,
    Just talk to the folks in your family who do the food shopping. $4 for a loaf of bread! Check your health insurance bill lately? As usual the baloney coming from the government is exactly that, baloney.

  • Sam, you’re 100% right! And at this rate, next week, you’ll be 500% right… then 1000% right…. grin!

  • PS: In Massachusetts, we’ve had “universal health care” for 3 years now – all designed to “save money” – but our small business health insurance has gone up 29, 30, and 30% each year since……………..

  • Matthew, Liked this post. Makes total sense. I remember the 70’s and 80’s (I will admit I remember the 80’s better). It’s pretty obvious what can happen with inflation. What was the price of coffee in the 70’s? I worked in lending in the 80’s (that was an insane time–the use of excessive “creative financing” of course rates were at 16-18% for mortgage loans…

  • Inflation is both destructive and uncontrollable. I just can’t believe they’re going to try to do this ON PURPOSE.

  • Groom66097

    Matt, the reality is the only truth. And if not just take a look to what happened in Brazil in the fifties, or Argentina in the seventies. Well said Matt, well said. Even in the absence of a next bubble Real Estate, it is the only defense against inflation, politicians and central bankers. Otherwise, I disagree with you in that Real Estate is not sexy. And now put your head down against QE2.

  • Angela Galvin

    Great article Matthew! We aren’t in the same boat but it is srtill a great time to get into the property market here as well – I now have inspriation for my blog post for this week!! Thanks

  • I love the comment,”$4.00 for a loaf a bread…”!! That’s exactly right. How would the government make more sand? 🙂

  • Steve

    Few investments perform well in real terms during periods of inflation. The North American housing market is so highly leveraged to the cost of money, if inflation does gain traction, the cost of money will also rise. Cash will indeed lose its spending power (its lost 99% of its “value” since the Fed Reserve was established to protect it), but property prices are unlikely to perform well in real terms. Cheap, if not free money is preventing the housing market from collapsing. Take this away and its “all over red rover”.The 70’s will be remembered more for 30 year mortgages at 19% and stagflation than a bad time to be holding cash.