John wrote:
Aloha Tony! Of course, I hate to rival your position, but do not count on inflation raising home prices. Inflation is not simply the supply of money, it is the VELOCITY of money or, how many transactions occur and how fast it moves through the system. Another function of pricing has to do with supply and demand.

For example, say we get hit with 20% annual inflation. Under those conditions, you would expect iPhones, for example, to rise about 20% in price. Now also, assume there are 20 Billion iPhones in a warehouse for sale, do you think the price of iPhones will rise? Of course not because there is an iPhone for every person on the planet. Now, if those 20 Billion phones were UNKNOWN, then YES the price will rise with inflation and a smart seller would slowly sold off.

The housing market does not have the potential to keep supply secret as it is a known fact that the supply, not including foreclosure pipeline properties, could be as much as three years under normal demand conditions.

With this supply situation, and transactions at an all time low, there is NO velocity in the system. The following would have to occur for housing prices to rise:

1) The Fed continues to expand the money supply past 50T dollars (possible)
2) People would have to start buying and consuming like they did in 2008 (unlikely)
3) People would have to start demanding loans from banks and getting it (unlikely)
4) Employment would have to drop to 5% (unlikely)
5) Consumer debt would have to drop by 1 Trillion (impossible in the next two years)

The outlying issues here are the following:
1) 20% of the consumer market has been removed from the equation
-- Credit card defaults, bankruptcy and foreclosure has destroyed credit for them to borry
-- This will take a minimum of 2 years and a maximum of 7 to resolve

2) Lending standards have been increased, only 60% of those even eligible qualify
-- So no matter what the demand for money, fewer transactions than normal will occur
-- IF they lower standards, and money does start to get lent, then interest rates will rise!

3) The US dollar would have to devalue to an all time low against other currencies
-- This is nearly impossible as every other country wants the same thing
-- A lower currency means more exports and improved balance sheets
-- Everyone can not devalue at the same time
-- Complete dollar destruction, that would lead to immediate inflation, is not possible

4) True unemployment is in the 20%+ range
-- Very few will be able to show two years prior and stable income
-- Very few will have assets necessary to satisfy equity to loan ratios
-- Most have attacked savings to make ends meet during unemployment
-- Many have decimated their credit in exchange for paying electric and food

5) The period of expansion we just experienced (pre-recession) DISPLACED the private sector
-- When governments take in MORE money, they should cut back
-- The role of government is to FILL THE GAP in employment when recessions hit
-- Our governments, at city/state/county/federal levels, all expanded in size
-- The governments did not save during the expansion, they borrowed and spent more
-- The government has effectively crowded out private business

SO ... under NORMAL circumstances, yes, some inflation would be nice, and prices would rise. Never in the past have we had the following, all at once:

-- Government is suffering massive layoffs due to massive expansion
-- The expansion of this government is left with massive debt on all levels city/state/county/fed
-- The supply of housing is increasing faster than any demand can address
-- The availability of money has been reduced (as a reaction to easy credit) severely
-- 20%+ of the population is and may have been, unemployed for 12-18 months
-- The fractional banking system is extended beyond measure
-- Monetary and fiscal policy are BOTH exhausted (no more measures can help short term)

SO ... not to be doom and gloom, but the simple fact is, something has to give, FIRST before any repair can occur. If you see Ireland, Portugal, Japan or Greece actually default on their debt, then the healing will have begun. Debt is our major problem because NEVER has leverage and fractional banking created SO much money SO fast in the system.

Well, I kind of went on ... but it's late and it is hard to make a decent case in a few sentences these days :-)

Good luck out there in paradise! Mahalo!!

Posted on Sunday, October 17th, 2010 at 9:56 PM.