patrick.net

Whether housing is a hedge against inflation depends largely on how the property is acquired.

If a buyer pays cash then the price is locked in. (There is an opportunity cost with cash in the sense of not being able to get interest and other benefits.)

If the buyer pays with a fixed rate loan then the monthly cost is locked in.

If the buyer financing with an ARM then all bets are off, the risk of inflation has been moved in large part to the borrower from the lender. This is why ARMs are easier to get.

OurBroker says

Whether housing is a hedge against inflation depends largely on how the property is acquired.
If a buyer pays cash then the price is locked in. (There is an opportunity cost with cash in the sense of not being able to get interest and other benefits.)
If the buyer pays with a fixed rate loan then the monthly cost is locked in.
If the buyer financing with an ARM then all bets are off, the risk of inflation has been moved in large part to the borrower from the lender. This is why ARMs are easier to get.
Peter at OurBroker.com

Untrue. The inflation expectation is priced into the fixed rate products...that is, this is why a 30 year fixed rate is 2.5 points higher than a true ARM...and a 10/1 ARM has a higher initial rate than a 5/1, and 5/1 higher than 1/1, etc.

A fixed rate mortgage only wins if inflation outpaces expectations. Based upon the yield curve, which is relatively steep, there is an expectation of inflation and increasing interest rates. How inflation occurs vs. this expectation will determine whether or not an ARM or fixed rate product is superior.

Dave --

We disagree. While ARMs have been a good deal for a number of years because we have not seen rates at 7 percent, 8 percent and above, there's no certainty that such rates will not return. The idea that lenders can predict the future is obviously questionable -- just look at the smart folks who gave us option ARMs, the S&L crisiis, etc.

The European Central Bank has just raised its rates and its hard to believe that inflation will not catch up with us.

"As of January, the average interest rate paid on relatively safe vehicles such as short-term savings accounts, time deposits and money-market funds stood at only 0.24%. That's one-tenth the level of late 2007 and the lowest on records dating back to 1959. Such depressed rates don't come close to compensating for inflation, which was running at an annualized rate of 5.6% in the three months ended February." (See: The Wall Street Journal, Fed's Low Interest Rates Crack Retirees' Nest Eggs, April 4, 2011)

http://online.wsj.com/article/SB10001424052748703410604576216830941163492.html

I've been told that best inflation investment is into companies that can raise prices during inflation. Buying consumer goods themselves isn't going to net a profit necessarily, it's usually a money losing operation since under capitalism overproduction exists.

Everything I hear about Bay Area sounds like a bubble to me, so I'd advise against it. And if you really expect hyperinflation (very unlikely as people don't have the paychecks to back it) than you can invest into foreign currencies which are not pegged to the dollar.

I really though, do not see inflation. In our area too many are underemployed or unemployed.

Imagine that ARM interest rates rise to 7 percent from, say, 5 percent. That's not high by the standards of the past five decades, but monthly payments for a $100,000 ARM would go from $536.82 for principal and interest to $665.30. That may not seem like a big deal, except when you think about the unemployed and the underemployed. It's a bigger burden on top of other burdens.

If someone has a fixed-rate loan and not an ARM it's not an issue.

OurBroker says

The European Central Bank has just raised its rates and its hard to believe that inflation will not catch up with us.

All of the inflation experienced by the US and EU is due to commodity price surges. However Germany (er... I mean the EU, but really Germany calls the shots) has a different situation than the US:

1) The EU has a highly unionized workforce that can demand higher wages for the same productivity - setting off inflation. The United states does not.

2) In the US, really the only workers that have that kind of bargaining power are public unions, but states and municipalities are facing very serious debt problems so significant wage increases are unlikely for a years. Germany does not have that problem.

The EU has a much greater chance of inflation than the US from rising commodity prices. Already they're above 2% for their overall measure, while we are more like 1%, and they are less of a commodity dependent economy than we are.

Mark --

Agreed. The problem with commodity prices is that folks outside the US like the way we live and so there is increasing competition for oil, food, etc., and thus pressure to increase prices worldwide.

As well, if the Treasury cannot fund the debt at today's rates that will substantially increase government costs and be a huge problem.

Hi --

Also, a lot of US ARMs are based on the LIBOR.

It looks like China is a net buyer again as they pitched in for $700billion more of US debt last year. In the words of Joe Six Pack: "How much a month"? (I know, it should really be this chart, but the other one really drives home the point). So far, it looks like everyone is doing their part to help us out. It's going to get ugly if (when?) we are cut off...

toothfairy says

what makes anyone think jobs will come back? Look at any historical chart of unemployment.

But thos historical charts don't take into account that job can be outsourced today.

Fixed mortgage payment is a hedge insofar as you know what your payment will be for as long as you want to keep that mortgage. You don't know what rent will be. You also don't know what HOA fees will be if buying in a complex. If you never borrow additional principal, and are someday able to refinance to a lower rate, your payment can go down. Property tax will go up. Insurance will go up.

The amount I set aside each month for tax & insurance is $210/month higher today than when I bought my home 20+ years ago. Due to refinances at favorable interest rates, the principal & interest payment is $240/month lower than my earliest mortgage on this property. Because of extra principal payments, I will be paying off in 21 years instead of 30.

However, mortgage payment is not comparable to rent payment. I don't know about condos, but houses eat money! Be prepared for the home improvement store to suck money from your wallet every time you drive past it.

"Buying a house to protect against inflation, what am I missing"

Was true back in the 1970s when inflation impacted or was caused by increasing prices and wages. But that is no longer true, wages do not increase with price inflation.

In some industries you have deflation.. prices of goods sold have declining over the years which result into cutting into compensation.