What Inflation Means for the Housing and Commodities Markets

If big inflation is headed our way it will mean trouble for investors. Some experts suggest buying a house may mean a good balance to inflation. Investors will …

If big inflation is headed our way it will mean trouble for investors. Some experts suggest buying a house may mean a good balance to inflation. Investors will also continue to buy up commodities as a hedge against inflation. See the following article from Money Morning for more on this.

A few weeks ago, Money Morning Contributing Editor Martin Hutchinson warned readers about the looming inflation tsunami threatening the United States.

Easy money policies like those of the U.S. Federal Reserve and other central banks have helped raise prices in emerging markets, as well as the United States, and sent the commodities sector surging.

"[W]e can expect inflation to be with us for several years, too," said Hutchinson. "In fact, expect it to get worse for the next three to four years, while Ben S. Bernanke remains at the helm of the nation’s central bank."

As inflation threatens to eat away at the value of stocks and bonds and cut into investors’ returns, Hutchinson said one of the best investments to make ahead of rising prices actually is a house.

The housing market is at or near its bottom and rates on 30-year mortgages are desirable for buyers. Investors who find the right neighborhood, strike a good deal and don’t financially overextend themselves could find a sound housing investment as the best store for their money.

While Hutchinson thinks owning a house offers a good balance to inflation – and is in the process of buying a home right now – he is not ignoring the real estate’s pitfalls. He warns investors to not commit all of their wealth to the "treacherous and illiquid sector" that has left many investors badly burned in the past. But since everyone has to live somewhere, and renting is essentially a short position, a one-house investment with a mortgage fitting the buyer’s finances is a smart way to play real estate.

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Hutchinson’s analysis prompted many reader comments like this one from reader Robin: "Awesome article! 1982 to 2000 also coincided with the secular bull market for stocks at that time. In essence, your article basically explains the basis for the secular bulls and bears – great!"

Do I Sell Now?

Q: I own a house in Washington, D.C. that I am currently renting for 33% above the monthly mortgage payment. I bought the house in 2004 with a 7-year adjustable rate mortgage (ARM) and refinanced in 2009 with a 30-year fixed 4.75% loan. I currently have about 35% to 40% equity in the house at today’s prices.

After reading your article, I’m not sure if I should sell the house when the current lease expires in June or continue to rent? I agree with your projections that the Washington area will see "downsizing" as the budget crisis is resolved and this could mean falling house prices for the area. However, Washington being Washington, a new group of players usually replaces the previous group, thereby maintaining the status quo in some respects. Your thoughts?

– Jeff J.

M.H.: Nationally, I think rents are about to start rising fast, because over the last 10 years they haven’t risen much. Rents rising will be one of the factors limiting the future fall in house prices. Washington, D.C. is tricky though, because it depends on whether government is expanding rather than the overall economy – the local housing market had a lousy 1980s! Your guess is as good as mine as to where you think politics is going over the next 5 – 10 years, but if you think President Obama will be re-elected, you should probably hang on to your Washington, D.C. house. However, if this is your only retirement savings, sell it and put the proceeds into stocks, preferably though a 401(k).

Keep Buying Silver?

Q: I see your point on gold, but I don’t understand you coupling it with silver. It would seem to me that silver is an excellent investment going into a potential inflationary cycle. Am I missing something?

– Steve L.

M.H.: Silver and gold are very closely linked; the speculative demand exceeds the industrial demand for both. Your precious metals investments should be spread between the two, and should not exceed 20% – 25% of your net worth (including mining shares).

What About Real Return Bonds?

Q: During the late 1970s inflation, metals and oils also increased in tandem with inflation until interest rates really jumped up. Can you look into buying real return bonds now? If inflation goes up, the bond will pay more and move up in value. Double action possibility?

– Charles C.

M.H.: Commodities generally have had a hell of a run, pulled both by inflation and by emerging-market demand. I think they have further to go, but more at the industrial end than at the precious metals end. If by "real return bonds" you mean Treasury Inflation Protected Securities (TIPS) and the like, they will protect you against inflation, but their yield won’t necessarily drop as inflation rises. Since I expect current sloppy money policies to end, pushing real interest up as well as nominal interest rates, I would expect the real return on TIPS to rise somewhat – and prices to decline.

This article was republished with permission by Money Morning.

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