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

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  • Tim
    replied
    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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  • hillaj1
    replied
    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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  • tailwind225
    replied
    Good points, thanks for the responses.

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  • CM
    replied
    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.

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  • CM
    replied
    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.

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  • jacoavlu
    replied
    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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  • tailwind225
    replied
    Originally posted by Hank View Post
    I’ve been expecting high inflation since we first used a doctor loan to buy a house for almost $0.5M with nothing down back in 2004. Interest at the time was 6% and we were sure it was going to skyrocket upwards.

    Yeah, here we are with negative real rates in the U.S. and negative nominal rates in Switzerland and elsewhere.

    Perhaps we really will see a giant run up in inflation. Ives been expecting it for a decade and a half and inflation has only slid lower over that time. (Cloudy crystal ball and all that.)
    I'm usually a proponent of the cloudy crystal ball and the "it's never different this time" philosophy, but with regards to inflation, the data would suggest that things are different this time - at least compared to your 2004 reference point. The government has printed 40 cents for every dollar that existed in March and this data is before the most recent stimulus package. See the below charts:
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  • Hank
    replied
    I’ve been expecting high inflation since we first used a doctor loan to buy a house for almost $0.5M with nothing down back in 2004. Interest at the time was 6% and we were sure it was going to skyrocket upwards.

    Yeah, here we are with negative real rates in the U.S. and negative nominal rates in Switzerland and elsewhere.

    Perhaps we really will see a giant run up in inflation. Ives been expecting it for a decade and a half and inflation has only slid lower over that time. (Cloudy crystal ball and all that.)

    Leave a comment:


  • GogglesandScarf
    replied
    Originally posted by tailwind225 View Post

    So now add leverage into the mix. So at 10% down, you are 10x leveraged. So that 1.6% return results in a 16% return
    Yes, that is how leverage works.

    Your investment is your down payment and your return is the future value minus the purchase price divided by your initial investment. The smaller the denominator, the larger your return.

    Of course there is the cost of interest.





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  • Jack_Sparrow
    replied
    I’m betting we see mega inflation so I took out a doctor loan and out 0% down instead of putting down 20%. Just my hedge of course kept the 20% in equities.

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  • TheQuietOne
    replied
    I’m probably going to be the only one to say this but why not keep the cost low but also think of it as an investment? Depending on the area you live in, the house could appreciate quite a bit (some places even 10%). With a big purchase like a house, I think it would be wise to always think about what your exit strategy is going to be (like just sell or turn into an AirBnB or more long-term rental, etc). If you are interested in rental income, I also don’t think it would be unreasonable to consider whether your house will be a good and easy rental property or not.

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  • CordMcNally
    replied
    Originally posted by hillaj1 View Post
    My advice would be to stop thinking about your primary residence as an investment and start thinking about it as a cost. Keep costs low. Invest the rest according to a written investment plan, which may or may not include a hedge against inflation.
    Bingo (was his name-o).

    Leave a comment:


  • hillaj1
    replied
    My advice would be to stop thinking about your primary residence as an investment and start thinking about it as a cost. Keep costs low. Invest the rest according to a written investment plan, which may or may not include a hedge against inflation.

    Leave a comment:


  • tailwind225
    replied
    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.

    Leave a comment:


  • Random1
    replied
    So now add leverage into the mix. So at 10% down, you are 10x leveraged. So that 1.6% return results in a 16% return in year 1 of ownership

    No of that really matters for a primary residence , which I would consider more of a consumption item. You could then just buy a smaller house and use the same amount of money to put 20% down.

    The two items I would try to justify on a home purchase is , do you like it, and can you afford it. A primary residence is a place to stay, it may turn to be a good investment or a poor investment, there are too many variables which are out of your control. If there is hyperinflation, you still need to be able to sell it to someone to make a profit, and if there is deflation , at least you have a place to sleep at night.

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