Will Inflation Be the Next Shoe to Drop?

General Real Estate Investing
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INFLATION IS NOW OFFICIALLY OUT OF CONTROL! That’s my thought, even though our idiot government keeps claiming inflation is very low. Here’s what I know. As of yesterday, regular gas was $3.79 per gallon and rising every day. Milk and groceries - we all know about that and it’s not a pretty picture. I bought a fire extinguisher a couple of days ago at Lowes. A few months ago they were about $10, now they’re almost $13. I could go on and on listing all the prices that have greatly increased the past couple of months, but everyone already knows this.

My question is when will this runaway inflation push the economy over the edge? I think we’re getting close. What effect will this runaway inflation have on the housing market? Although we’re at very high occupancy, rents have decreased slightly in our area, which is quite odd. When will housing prices really drop? When will unemployment start to really increase and what effect will that have on rentals? People have got to live somewhere but will they have the money to pay the rent?

Things are getting interesting!

Mike

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This is a great question…

Let’s look at what the “EXPERTS” told us over the last several years.
In my opinion, by looking at their “predictions” we can actually see a very strong indication of where we will end up…

First off…2005…There will be NO HOUSING BUST!!!
What do we have??? …The exact opposite of what they predicted… A HOUSING BUST.

2006…home prices are NOT falling…they are simply “re-adjusting”
What did we get???..Falling housing prices.

2007…The Sub-prime issue WILL NOT spread to the general economy. IT IS CONTAINED!!!
What did we get??? …A GLOBAL financial CRISIS that DIRECTLY created the inflation we are seeing NOW. The FED had to pull every trick they could out of their hat. They DUMPED interest rates. When you lower rates THAT FAST, and that much, the ONLY result is a U.S. Dollar at NEVER before seen lows.
Oil is traded INTERNATIONALLY in U.S. Dollars. If the value of that currency is falling, OIL HAS TO RISE in direct proportion to the dollars fall…So…NOTHING was “contained.”

2007…The FED…“According to the CPI, inflation should be contained.”
It may be of interest to note the CPI (consumer price index) DOES NOT include food and energy prices :shocked :shocked :shocked Are these people kidding??? I don’t know about you guy’s, but in my home FOOD & ENERGY are NOT something we can do without.
So…The Fed tells us inflation is contained…

WHAT DID WE GET???
The highest inflation rates this country has seen in 30 years!!!

So with that as a back drop, let’s look at what we’re being told now???

The BS…“The economy will rebound in the second quarter of 2008”

The REALITY…No, the economy is going to be WORSE in the second quarter and worse still in 2009. The jobs reports SUCK. That WILL impact this economy. THOUSANDS of businesses are going BROKE due to SOARING energy costs. Have you been to a restaurant lately??? NO PROBLEM GETTING SERVICE WHEN YOUR THE ONLY ONE THERE!!! Think that might just have an effect on our economy??? It’s a chain…the suppliers are hurting, the customers are hurting, and on and on…

The BS…“The Real Estate market has hit bottom.”

The REALITY…Prices are not only falling, but the RATE of those drops are actually INCREASING. (In New England)

Mike brought up a good point in his post…With all these people LOSING their homes, WHY ARE RENTS ACTUALLY DROPPING???
The REASON??? Your state is LOSING population!! Your in a BIG industrial area (like me). The jobs there are not only GONE, but they are NEVER coming back. When you can’t find WORK, it doesn’t matter what rents are. YOU LEAVE!! That creates LESS demand for rentals and causes rents to drop. In addition, you have more INVENTORY coming on market from people who CAN’T sell their homes.

The other factor I hear very few people talking about is the MONEY POURING into commodities. The stock market has sucked for 2 years now. Interest rates are in the TOILET, so that means traditional interest bearing securities, like money markets, and C/D’s pay NOTHING.
So what IS happening is a LOT of that money is being POURED into anything that is NOT going down in value!! That means commodites. Metals, grains, sugar, RICE (up 100% since January!!) and OIL are the only thing going up. BIG time Wall Street firms are PUSHING so much money into these markets that the volume alone is astronomical. This is leading to higher and higher prices for the EXACT same reason condo’s in Florida went nuts. Too many people chasing to few (fill in the blank here)

It’s gonna get a lot worse before it gets any better.

Cripes I remember saying this was coming 2 years ago and getting HAMMERED for it. TOO NEGATIVE!!!

It’s not about NEGATIVITY folks… it’s about REALITY!!

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I just paid $20 for a 10 foot length of copper pipe. 6 months ago it was only 8 or $10. I forgot about the precious metals increase. Also on that note, I quickly read a headline about the govt. approving a new coin that was made from steel??? I didn’t get a chance to read what it was all about. Things are looking bleak on a manufacturing point. But in areas around hospitals and universities are doing well in my area. I;ve often seen people who are unemployed in manufacturing go to college and get into healthcare. I’ve personally gone this route. During tough economic times, people will still always need healthcare and a desire to re-educate themselves to survive.

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Gas here in Indiana went from $3.22 to $3.75 in about 2 weeks. Then went down from $3.75 to $3.53 in about 2 days. Then went up from $3.53 to $3.87 per gallon in just another 2 days.

I have no idea how gas prices can go up and down that fast, but I will say this…

Im ready for gas prices to go really high. Itll make jobs not worth leaving this country to go to China because the high gas prices will just kill thier profit.

Thats a positive way to think about things(as far as gas prices go)

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I was sitting in a waiting room the other day reading the daily paper that was laying on the chair. I about dropped a nugget in my britches when I read that gas prices will be over $4 by summer and over $10 per gal by the end of the year.

$10 PER GAL at Christmas time. What does that mean other travel expenses will be? Plane tickets, car rentals…

My opinion has been for a while that the dollar is being phased out. The Amero is the new currency the guys running the country want us to start using. Its one more step toward one world gov. Pretty soon we’ll be seeing the ‘wheel barrel’ effect. (This is a reference to a story in Germany durring WW2. A woman with a wheel barrel full of German Marks went into a store to get bread, leaving her wheel barrel full of cash outside. When she came back, the cash was all piled on the ground and the wheel barrel had been stolen.)

I thought this was pretty interesting too. What is your opinion? http://www.gata.org/node/20

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I think the real danger is that ANY additional shock to the economy may be enough to throw us into a depression. For example, a dirty bomb or crude nuclear weapon going off in NYC. Or Israel finally attacking the nuclear facilities in Iran (which is imminent in my opinion). Or a major earthquake in California/Nevada. How about a flu pandemic? Even the idiot socialists coming to power and drastically raising taxes would probably be enough to destroy the economy.

Anyone else buying a few extra cans of food each time they go to the grocery store? We’ve been doing that for months.

Mike

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Hey Mike,

No problem stocking up on food as long as it isn’t RICE!!!

Sams Club is now LIMITING the amount of RICE that can be purchased at one time.

Last week BRAZIL offically STOPPED exporting rice.

This is FAR worse than even my bleak predictions saw coming.

Mike’s 100% right…ONE single World event, just one…and it’s OVER!!

I will add though…there is absolutely no better cure for high prices, THAN HIGH PRICES!!!

I work with Firemen…NO BODY, and I mean NO BODY, likes their Power Stroke Ford Pick ups, Hemi Chargers, and Cummings Turbo Diesel Pickup trucks better than these guys… Want to know what these guy’s are driving to work now???

Cheap, used, Japanese motorcycles!!! 70 miles to the gallon. We also have BOAT loads of guys RIDING BICYCLES to the Stations.

It’s not going to last forever. Like RookieNYC has said here a bunch of times…big money is buying U.S. dollars as I write this. The interest rate drops are over. At some point this MESS is going to hit Europe. Up until now they have RESISTED lowering interest rates there. That will change shortly as the “America” effect hits overseas. Once they start cutting, a whole bunch of money will start POURING into the Greenback. That WILL effect oil prices to the down side. My best guess is we are getting close to a top in commodities.

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Not to mention the periodic changes in the way the BLS calculates inflation, as shown in this graph: http://bigpicture.typepad.com/photos/uncategorized/2008/05/08/bizinflate430_sm.png

Courtesy of The Big Picture, a great economic web site: http://bigpicture.typepad.com/

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This is exactly why I have pounded the table calling for this moron Bernanke to raise rates and cause a commodity crash…Stuff all those long traders with steep selling,it will cause a commodity crash…Stick it straight up OPEC’s u know what…Make that dollar rally so hard that traders step infront of each other to cover shorts and squeeze the life out of the US Dollar bears…Now I should wake up from my dream and say this will most likely not happen for atleast 2 more years…By that time oil will be $180-$210 per barrel,gas will be $7-$8 a gallon…Businesses are failing left and right,no one I know besides traders are making money (and also the loan to own crew)…These current economic times will make people realize if they saved correctly or not…%90 of Americans have zero dollars saved…%90 !!!..Paycheck to paycheck and overleveraged the classic spend like a drunken sailor American way…What a country…People are getting what has been long overdue…This country needs a prolonged depression and worst part is once we start to see the light Bernanke will be forced to raise interest rates to the highest levels we have seen in 20 years…I predict we see %8-%9 interest rates in the next 3-4 years…That will be the only way to kill the commodities market and make the US dollar reverse hard…

The stock market has sucked for 2 years now.

I’m puzzled by this one fdjake…The market roared in 2006,2007,I was up %23.5…If that sucks give me that pain any year…Even in 2008 I’m skeptical how far down we close if any at all…The equity markets are usually a forward indicator…So far I’m on the fence…But the more I hear and read doom/gloom the more I watch the long side…This economy won’t change until there is a major shift in monetary policy in this country…

Keep in mind that these Sovereign Wealth Funds don’t take 100’s of Billions of dollars and shove them into American markets to watch them disappear…Smart money steps in when the average guy is scratching his head waiting for the big one to come that never does…

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10$ a gallon!! Holy cripes haven’t heard that one yet. I gotta get out of the ghetto from time to time and catch up on reality.

TThe savvy investors here need to be buying rentals near major job hubs (downtown here, for the state jobs in Raleigh). The 10 bucks a gallon is gonna change some suburbanites’ minds of where they need to be livin’

See mom, I’m not so crazy am I?

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“The stock market has sucked for 2 years now”…

2 years ago DOW at 11,500

Today, 2 years later DOW at 12,740

That sucks in my opinion.

Now having said that, I sure as hell can’t trade like RookieNYC so I have no doubt he SCORED during the years he was talking about.

My point was that for a LOT of regular people, the stock market hasn’t made them much money in the last 2 years. Sure they were up in 2006, but being up and MAKING money are TOTALLY different. Most of the guy’s I know just watch it go up and then back down. They don’t sell when they’re up, they sell WHEN THEY’RE DOWN. Like most Americans.

The point I guess I was trying to make was… …Commodities are just on fire. These guy’s can not get their money into this stuff fast enough.
When WALMART and SAM’S CLUB start rationing RICE something in this world has fundamentally changed.

Again…I said it before, I would not be surprised to see the world experience a GLOBAL depression. Now that doesn’t mean EVERYONE GOES BROKE. The famous Wall Street trader Jeese Livermore came home from work the day of the 1929 stock market crash to find his wife had moved their belongings into the guest house on their estate. She said to Jeese that she knew they were broke…

His reply???

“I made more money today than at anytime in my investment career. We are are richer than we have EVER been. Have the servants move the furniture back!!”

Unfortunately…not a lot of people will be singing that song.

Think Rookie’s wrong??? Don’t bet on it!!

Take a look at this…

http://www.youtube.com/watch?v=dR7h8NBQU3E&feature=related

Oh and don’t miss the reference to Yales Robert Shiller in this report. Schiller called this housing bust when home prices were SCREAMING!!! I remember that MORON economist from the NAR LAUGHING at Schiller’s prediction of “the worst housing crisis in American history.”

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I guess the only question for those of us in the rental business is whether there will be enough people to pay the rent. My understanding is that during the great depression unemployment reached about 33%. By comparison, I’d say that we’re at about 20% RIGHT NOW. In 1929, the government didn’t have all the welfare programs and everyone was expected to work and be productive. Today, the idiots in the government only count unemployment as people who are actually looking for a job but can’t find one. So, the official government unemployment number is 5%, plus we have at least another 15% who are on government handouts (kept in financial slavery by the socialists) who don’t work and don’t want to work. Therefore, I would say that we’ve already got more than half the unemployment rate that they had during the peak of the great depression. Of course, all these government handouts and hidden unemployment are two of the reasons that the US is in terrible financial shape.

People must live somewhere. While I’m sure that there will be a LOT of bumps in the road, I think the rental property business will be about as good as anything could be in a depression.

We’ll see.

Mike

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I think your right Mike. Especially when your buying properties at the price points you are. The people who are absolutely screwed are the ones who listened to realtors as to the cash flow potential of the property they purchased. THEIR DONE!! GAME OVER!!!

YOU will be able to ride out longer vacancies in your units than they can. You can also rent at lower rates (if needed).

This is going to hurt everyone. The difference is YOU will SURVIVE, the others won’t.

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What John in NC said about people moving closer to work is already happening here. There is almost not a day that goes by here without someone applying for a rental with the reason being that they can’t afford the gas from their property out in the country to town where they work. They want to move into the city to save on gas. We’re barely into these high gas prices and people are already feeling the pressure. If these prices get over $4-$5 per gallon and stay there, that’s going to be a big problem.

Mike

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lol too bad old Jesse blew his brains out not long after…

Mike,
I think if you bought right and have back up funds you will be fine…People have to live somewhere but I can understand why you are thinking this way…I have read some horror stories about Ohio and it’s economic issues…

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I have read some horror stories about Ohio and it's economic issues..

Our area is not bad at all - YET (at least no worse than the past 50 years). I think all the bad economic things you hear about Ohio are up north, in the old rust belt areas that dealt with the auto industry.

Mike

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I have been preaching the inflation angle on this site and other sites for quite some time. One of the problems is the expansion of foreign nations like China and India. The more these people build, the higher the prices of the commodities that we use to build our properties.
Another problem is the cost of labor. A lot of us are used to getting our food, our landscaping, our roofing, and other services provided by illegal immigrants who are willing to work for a fraction of what American workers are willing to take. A lot of us are accustomed to getting our products from Wal-Mart. These products are often produced by Chinese workers. What will happen when the labor of workers form other countries finally gets recognized by the rest of the world for it’s true value? The price of everything that we buy goes up. Way up.
Everyone keeps saying that real estate is bound to go down. Do you want to know what your properties are worth? Get them insured. Insurance companies are people who know how much labor and materials are going to cost when a property burns down or gets sucked up by a tornado.
Okay so lots of markets are now overbuilt because of an aberrant boom from 2000-2005. Most major metroplexes are reaching the trendline of median family home prices from 1940-2000 right about now. Just because the supply temporarily exceeds the demand, does not mean that the prices of 2008 are the fixed, unchanging value of real estate. Just because properties seem to be falling endlessly now does not mean that this trend will last forever.
I remember a couple of years ago on this site when everyone was predicting a real estate bust because all of the newspapers and television shows were singing the praises of real estate. What are the newspapers and television shows saying now?
Anyone who picked up properties with adjustable rate mortgages need to refinance now.
I would like to make the point that it is a difficult game to forecast inflation, recession or stagflation. If any of us could do that with a degree of accuracy, it would lead to piles of money. The point is that when we make investments, we need to hedge against all of these problems. By focusing on appreciation, depreciation, leverage and cash flow I think that real estate investors can survive and realize profitable gains.
I think that the United States needs to institute a work for welfare program right now. If people do not want to work to contribute something to the world, then they can work as punishment for contributing nothing.
There are many states currently who punish people for loitering and panhandling by sending them to a farming work program. They live in subsidized housing on a farm and essentially live in a military type environment where they are expected to wake up and work all day in the name of having a place to live and having food to eat. Most of the world subsists on less than $1 a day, and our country has people who sit around all day texting on their telephones, watching daytime television via satellite, plasma screen TV, and driving around in their SUVs, which are the size of the space shuttle. If there was ever a civilization that lived in denial of the realities of economics, it is the United States of America today.
I love this country, but I fear what our culture has become. We have such a collective sense of entitlement that it is only a matter of time before cultures with a strong work ethic and cultures that appreciate opportunity will overcome our own.

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Great points Steve.

Especially your point about foreign labor wages eventually heating up.

I agree 100%

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I love this country, but I fear what our culture has become. We have such a collective sense of entitlement that it is only a matter of time before cultures with a strong work ethic and cultures that appreciate opportunity will overcome our own.

It’s been happening for a very long time…Immigrants,some illegal some not come into this country every day showing how an American should work…I said this many times,the typical American is a clock watcher who expects off on weekends,holidays,sick days,personal days,hangover days etc…Lazy undisciplined Americans that don’t save a dime,live paycheck to paycheck,spend like they make millions deserve a long and painful depression/recession…We spoke about this in another thread and I think the topic was misunderstood and I MISTAKENLY demonized all unions…But there are some people who hide behind this curtain of protection,all the while an illegal immigrant or legal would work them under the table and would demand 1/8 of the drama the typical American commands…

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The House approved making pennies out of steel and and recommended the same for ‘nickels’ …

http://www.boston.com/business/articles/2008/05/09/the_price_of_a_penny_stirs_calls_for_steel/

Keith