I got some really great questions today regarding yesterday’s post so I thought it would be helpful to clarify a few things.
In yesterday’s post, I was talking about purchasing a home as your primary residence, and saying that I feel there are other investments right now that are a better use of your money. Rental property, however, is a completely different story… From a cash flow perspective, rental property can create income; your primary residence is only an expense.
Another question I received was on my view of home ownership in general, which I’m all for. I just don’t think now is the best time to buy a home. With that said, when the stars align, (meaning inflation looks to be rising and the market fundamentals are in place to support rising housing prices) I think we’ll see possibly the best time to buy a house in a very long time. I doubt inflation will hit like it did in the 70’s and 80’s, where it ran up to the mid-teens, but if you’re able to lock in a fixed rate mortgage under 5% and inflation eventually rises above 5%, you have a negative real interest rate on your mortgage! (And for the time being, it’s tax deductible) The higher inflation goes, the better!
The million dollar question is: When will this be? I really don’t know the answer, but I’m confident that we have a few years given the Fed’s statement that they plan to keep short-term rates where they are until mid-2015. The best way to gauge inflation is to watch the yield-curve (the yield on Treasury bonds at various maturities). The 10-year Treasury bond is currently yielding around 1.6%. This says that the market expects VERY little inflation over the next ten years.
Finally, someone asked about inflation right now. Yes, we are getting hit with inflation today (as our currency depreciates) in the form of higher prices at the gas pump, grocery store, gold, stock and bond markets. However, we’re not seeing inflation in income. This tends to constrict budgets and ultimately demand, leading to further deflationary draw-downs.
To sum it up, I have nothing against home ownership and the benefits it can bring to your family. I simply don’t think you need to rush out today to lock in a low rate (sorry mortgage lenders). You have plenty of time so why throw on all the extra expenses that come along with owning a home.
As always, thanks for checking out my blog!
-Nick