Actually Grace you have it wrong on housing and inflation. A house is not a promise to pay cash in the future -- while that is what a bond is, along with regular cash payments to pay "rent" on the money.
Damn, I could have used that expert opinion against the IRS who annoyingly wanted me to declare all those rents I received on my residential RE properties over the years as income! I had no idea I didn't have to see those rents as cash income. Certainly it is true that my tenants didn't necessarily see their lease as a "promise to pay".
Housing on the other hand is a hard commodity
And like a commodity like money (as in your bond example) it can be rented out. In some sort of broad way you are right about housing being a commodity. I tend to define commodities more narrowly as goods that are fungible. This is something that houses clearly aren't simply because they happen to be attached to land and land clearly isn't interchangeable. A gallon of unleaded gas in Des Moines is about the same as one in LA, but an acre of land in either place has a distinctly different value.
Housing prices go up in inflationary times because money is depreciating and is risky to hold.
I didn't say houses didn't go up in inflation, I said the present value of an asset that has future cash flows changes with inflation expectation. Actually the net present value changes with interest rates and interest rates encompass inflation expectations. As much as you say I can't liken houses to bonds, the net present value calculation for both is calculated the same way. This is known to anyone who has ever tried to value investment RE. For your own residence, you assign a cash value to non cash benefits like a roof over your head. What is funny is that, in light of how this thread got started, the easiest way to assign a cash value to the housing services you will receive in the future is to do what the Fed does, assign it the value of renting a comparable space.
People take a short position on cash by borrowing to buy a house and then go long housing by buying a house -- that is the traditional relationship between cash and housing in an inflationary environment -- short cash, long housing.
So your wife says, "On Sunday we need to look at houses because we really need to get short the US dollar." I used to say something similar, that people buying houses with borrowed cash have a net short position on dollars. This may be true, but no one does this intentionally any more than the shorts on SI say, "I want to be long the dollar!" when they short equities even if this is what they end up with, a long position on dollars/ short equities. (Maybe with the exception of Mish almost no one here thinks dollars will be worth more in the future).
People say things like, "This house will still be big enough when our kids come along. We have lots of space to expand here." or "We can put an apartment in if we have to take in Mom." or "we can turn that basement into a family room." etc. They value the purchase in terms of what they need today but also in light of their future housing needs.
People do build inflation into the purchase in that they think that their mortgage payment will shrink as a percentage of their income and the house price rise at least with inflation. But the biggest calculation when they decide how much they can spend it is in terms of their future earnings. If they are young, they are counting on a rising income. Incomes rise throughout a person's working life for reasons unrelated to inflation. A young home buyer at the beginning of their working life can usually count on a rising income as they gain experience and get more productive. I find people my age, who are at the age when income tends to level off, make the opposite calculation when buying a house, "We can still afford this house even if one of us stops working or we retire."
I owned a house in a ten year period where its price didn't rise a dime (while inflation was at a much higher rate than the last 7 years) so I've been trained not to count on price appreciation during periods of inflation. My experience in the 90s was pretty universal and not easily forgotten. |
