Stock market down, real estate market UP!!!!!! - Posted by David Krulac

Posted by Wayne-NC on July 12, 2002 at 09:25:33:

You may know more of Charles than I do because that is the only thing he said that I could remember but, I remember it well. Notice the change? He said, “stocks WILL grow.” But anyway, on to the meat of the answer. I think I understand this mud. If wage inflation goes to say 7% and housing increases by 14% it is more expensive, right? Now as I see it most people judge an expense by it’s monthly payment. If mortgage interest to my buyer goes up and my price stays the same his payment goes up ofcourse. If he cannot qualify now due to this higher payment, I am now looking for a new buyer or I lower my price which becomes a comp to my neighbor for 6 months. Let’s say my buyer is Mr. and Mrs. America over a years time per se. Talking in inflation adjusted dollars, the $1,000 mortgage payment now pays more in interest and less in principle which is all they can be approved for. Wouldn’t this begin to depress the home values? I know that the interest is the tax deductable portion so the net effect is a lower cost possibly, but my thinking was more shallow than your answer. The purchase of a home is paid with borrowed money and that payment is made with our purchasing power from wages. It is the numbers inside the mortgage that adjust accordingly to price and interest which is determined by inflation which has my attention at this point. As I said, most consumers are only focused on that monthly payment because that is what the lenders dictate unfortunatly and I see why. You see it all the time in car ads, appliance purchases, electronics, etc. Sorry, but I like this mud and it helps me make more dollars in the RE investing business and I am having fun which is what it’s all about. I’m having more fun than I should legally be allowed to have. Who said that? (I printed your response as it was one avenue I haven’t thought about. Thanks.)

Stock market down, real estate market UP!!! - Posted by David Krulac

Posted by David Krulac on July 11, 2002 at 09:17:26:

RE: Win/Win Situation? - Posted by Wayne-NC

Posted by Wayne-NC on July 11, 2002 at 09:48:47:

With interest rates low, stocks should grow. Differents times I guess. However, with the low cost of money, property prices rise as well. So, when and if interest rates rise due to the return of inflationary times and the key word is inflation, what happens to housing? Does it continue to rise as prices overall go up or does the leveraging effect of mortgages cause the price to fall? I am sure there is historical data somewhere but I am not aware of it. And again, these are different times.

Straight from Charles Givens… RIP - Posted by JT-IN

Posted by JT-IN on July 11, 2002 at 22:52:17:


“With interest rates low, stocks should grow” Good ole Charles Givens didn’t quite have the indepth story on this one, did he. Now I shouldn’t slam the dearly departed, should I. Sorry, I just never quite had an appreciation for his shallow advice, that is all. His track record has born out what a financial guru he really was.


On to the meat of the question…

“with the low cost of money, property prices rise as well. So, when and if interest rates rise due to the return of inflationary times and the key word is inflation, what happens to housing?”

Just because the price of a house is higher, does not mean that it is more expensive… Yes, read it again, try to understand this theory. I’ll go slowly here.

With low interest rates, there are lots of dollars chasing few properties, so consumer demand is driving the upward price of the RE mkt. Demand is strong and prices continue to rise, rendering an inflated market and prices. With low inflation this can truely make the effective cost of real estate to rise, feeling more expensive.

Conversely, if relatively high inflation occurs and the purchasing power of the dollar is dimished, but you have more dollars to pay more for an average house, this does not necessarily mean that the effective price of the house in inlfation adjusted dollars is higher.

There are many factors that go into this discussion, such as how long each of us work to make the equivilent of a spending unit (dollar… or hundred dollars, etc). This unit continues to be expressed as a higher number, being more dollars, but we are either getting the same amount of commodity, or more or less of that commodity, for the same spending unit that buys the same amount of the commodity. This commodity could be a dozen eggs or a house. So in inflation adjusted dollars we could be paying more for the house, but lessor percentage of our overall budget to buy that house, than would have been the case years earlier, expressed in smaller sum of dollars, but he adjusted price is still less. This is how inflated/deflated dollars affect our purchasing power, either more or less commodity for the inflation adjusted dollar.

Clear as mud, right.

Anyway, better to be thinking about how to make more dollars in this RE investing busines, whether they be worth more or less spending power, depending upon inflation.