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Inflation tsunami good reason to put as little down as possible?

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  • #16
    the discussion implies that you have a choice, as in you have enough cash that you could make a large down payment, if you so choose

    so part of the question is, if you make a small down payment what do you alternatively do with the cash? Presumably invest. So then, the return (or lack thereof) on that money is likely to be a greater determinant of whether a minimal down payment “wins” or “loses”, than would be the rate of inflation

    part of the point being, there are a lot of unknowns and necessary assumptions, so you can’t logic your way to a correct answer

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    • #17
      Originally posted by tailwind225 View Post
      Thanks for the responses. A couple things to clarify. I was trying to look at the impact of financing and future home price separated from the other expenses of home ownership for someone who has already decided to buy a certain house. For someone who has decided to purchase a soecific home, the upkeep costs will be a sunk cost unrelated to financing, and the overall return on the house inclusive on these could very well be negative. By separating out financing impact, Im just trying to determine if the overall return will be enhanced or diminished by financing. Forget Schiller for a moment. What is a reasonable minimum home future value? Lets assume home price will keep up with inflation. Yes there are areas that have had long term underperformance relative to inflation, but on average most home prices do not underperform inflation. So if mortgage interest rate is less than expected inflation, higher leverage will amplify this portion of the investment. If home price increases exceed inflation, this effect will be amplified.
      A house is a depreciating physical asset. It is made of wood, shingles, drywall, HVAC systems, etc. None of these things increase in value over time, they gradually disintegrate. Eventually, most houses will be bulldozed.

      The land that a house sits on may appreciate or depreciate, San Francisco or Detroit, respectively.

      Shiller (no "c") recorded sale prices for the same homes over time. These prices rose about 1% real, but he had no way to account for renovations, remodels, upgrades, etc. between sales. Most homes have expensive remodels/renovations/additions over time. These upgrades add value, but typically do not add anywhere near the cost of the upgrade to the resale value of the house. That's partly because the owner destroys the residual value of the existing structure when doing the renovation.

      In other words, I think it's likely that houses in Shiller's series had negative real returns, but he had no way to capture total costs.

      ***

      Regarding inflation and money printing: The new money causes inflation if it is used/turned over, but not if it sits in banks as excess reserves. Japan started down this path long before US and Japanese authorities have been unable to generate the desired inflation despite monetizing gov't debt that could never be redeemed otherwise.

      Much of the developed world has negative nominal interest rates, something "known" to be impossible until it actually happened a few years ago, yet Japan and Europe cannot generate the desired inflation and nominal growth.

      I have zero confidence in my own inflation/deflation projections. We are in an unprecedented time.
      Last edited by CM; 01-03-2021, 09:54 AM.
      Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried (many) bags for a lovely and gracious 59 yo Cyd Charisse. (RIP) Hosted epic company parties after Friday night rehearsals.

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      • #18
        Originally posted by Lordosis View Post
        Real estate is regional. Not everyone has an iphone and not everyone is in college or paying for college. So I don't see how those factors are any more real then CPI.

        My most recent phone was the cheapest I ever bought. Same for tv. Same for computer.
        I can still buy a bottle of black velvet for $10 like I did in college. But I choose not to now.
        Beware of lifestyle inflation
        Regarding inflation anecdotes, I purchased a hot sports car for about $37,500 in May, 1991, or $71,966 in today's dollars (https://www.bls.gov/data/inflation_calculator.htm). In November 2016 I bought a car for $32,059, or $34,566 in today's dollars. The latter car is safer, more reliable, and has many features not yet imagined in 1991. And the zero to 60 time is almost as good. It's a better car for less than 1/2 the price. No inflation there.
        Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried (many) bags for a lovely and gracious 59 yo Cyd Charisse. (RIP) Hosted epic company parties after Friday night rehearsals.

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        • #19
          Good points, thanks for the responses.

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          • #20
            Recent podcast The Long View from Morningstar with guest Liz Ann Sounders has a good discussion of inflationary pressures, and why we may not be seeing inflation rear its head until full employment is reached.

            I try not to worry about inflation too much, knowing that directly owning rental real estate is a pretty good hedge. It’s not that I don’t care about inflation, it’s just that my bandwidth isn’t broad enough to spend time “worrying” about it and letting it stall my investment decisions.

            In the end, the decision facing the OP is a small one and unlikely to make a significant difference in his/her long term financial success IMO.


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            • #21
              The problem with inflation on housing is you have to live somewhere. Sure my old house looks like a great sale price but everything else is so darn expensive.
              Not much gain there. Is downsizing even worth it? The replacement cost is through the roof.

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