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Marcus Auerbach#3 Starting Out Contributor
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Nobody is talking about the real impact of inflation

Marcus Auerbach#3 Starting Out Contributor
  • Investor and Real Estate Agent
  • Milwaukee - Mequon, WI
Posted Jan 14 2022, 05:32

Predictions for inflation have been around for years, now it's here and it will be for a while. It's in the news every day. CPI (consumer Price Index) came out a few days ago with 7.0%  for 2021 and when I look at the producer price index at 9.7% - biggest gain on record - it seems like there will be more to come. And this is global: Germany 5.3%, India 7.6%, Mexico 7.3%, Brazil 10%, Russia 8.4% (and then the catastrophic inflation in Turkey 36% and Argentina 51%)!

The current situation of 30y fixed rates being less than half of what inflation is seems absurd! Rates should be higher than inflation! This is upside down, how can lenders sustain this?

On top of that RE keeps appreciation - and from what it looks like - it will have to continue down this path. Many of us wish we could go back to 2009-2012 as the opportunity of a lifetime and buy more then - we might be looking back at 2022 the same way.

The general public's view on inflation is that it means price increases; gas, steaks, houses. Those are all short term inconviniences. Nobody is talking about that fact that their 401k just lost 7% and will probably continue to do so potentially year over year compounding down.

It also means that real estate got 7% cheaper, which offsets about a thrid of the national appreciation gain last year (about 20%). What puzzels me is that inflation with it's massive impact on REI is not a big topic here on BP.

I am on here every morning and there are still so many posts about when is the housing market going to crash and barely anything about inflation. This is a literal game changer. What type of rent growth will we see over the next five years. Try running numbers with 5% p.a. Inflation could be the best thing that happenes to anyone with a sizeable portfolio, it could also get really ugly if it starts to run away. 

Where will interest rates be in 5 years? Could we see double digits again? The current consesus is that we will see mortageg rates at 3.7% by the end of the year and I don't believe it. I am surprised there is no fear mongering about the crash of the USD. How wide can the wealth devide grow, before the tension gets too high? What gives? Where are all my fellow YouTubers - seems like the next big clickbait! Or will that still come?

Anyway, just some thoughts along my cup of coffee - time to get to work! 

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Trevor Murphy
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Replied Jan 17 2022, 17:28

Bob, thanks for the thoughtful response applying your personal history & lessons and the actions you are currently taking.

Yes a 20-30% drop in the stock market would undoubtedly hurt in the short term and trigger a margin call for me.  I do have a contingency plan ready if that does happen.

But in the long term since I am in my younger 30’s I still have time to recover and add more to my portfolio over time. 

My main goal was to refinance the loan sometime in late spring, early summer when the value of the house and equity will be high enough to make it worth pulling the equity out and paying off the LOC completely.

My interest rate at the moment is a fixed 30 year at 2.9%. $524,000 left on the balance

My LOC interest rate is 4.25%. $134,000 owed back.

My next question is, we expect interest rates to go up over 2022.  *guessing and using “what if” numbers”

If the new interest rates are 3.25-3.75% in the summer. Would it still be favorable to refinance? Or Keep my current 2.9%

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Matthew Olszak
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Matthew Olszak
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Replied Jan 17 2022, 20:20
Originally posted by @Marcus Auerbach:
Originally posted by @Karl B.:

Ken McElroy and Robert Kiyosaki talks about inflation all the time, including the wealth gap and what socialism/communism would do to landlords/the wealthy and so I get my fill of it listening to them and their guests. 

You're right - people don't talk much about inflation on here excluding the 'things cost more' statements I typically see.

I recently bought some value-add properties that are under market. Rents are going up and if any tenants want to leave I'm cool with that as I will be able to get market rent. 

Undermarket rents+ inflation = wowza

Yes - I think about the things you're talking about. Mainly the wealth divide and the threat of rent freezes and other governmental controls that could be even worse than rent freezing. Society won't be talking about how the Federal Reserve debased our currency due to the fact our clown government can't ever balance a budget... they'll instead target "greedy landlords" and will impact us in a negative way, no doubt. 

The government creates all the problems and then they pass the blame onto someone else.

Robert Kyosaki, I hate to say it, is a one hit wonder. He wrote a great book a long time ago and has spent the last 20 years shamelessly milking young investors through Rich Dad Education. He is one of the most consistent fear mongerers out there - predicting a crash as long as I have been in RE - and really just selling his stuff. New book, BTW.

Ken McElroy, where to start? Same, basically. Just watch his YouTube videos from 2020 and 2021. I am surprised he did not delete them, or did he?  Same concept, monetizing fear. Both have an anti-goverment redderic that is just not useful or constructive; basically unchanged since the 90s, no matter who was president. Also, socialism and communism are radically different concepts and I know in the US we use them interchangably.

But my post was not about politics (we have issues, and so does the rest of the world currently, no matter of capitalist, socialist or communist country - all have the same problems at the moment, interesting to note). 

It's not only landlords who have created massive wealth last year - every homeowner did. 50k to 100k in most states on average. Tax free BTW. That is half a life worth of savings for many workers who rent. And I can't see that go well for long... But it also poses great opportunity for those who know how to seize it. it's just a really big topic and it will define us for the next decade!

Kyosaki is a prime example of a broken clock being right twice a day. Eventually his "predictions" will pan out, and his followers will outright ignore all of the other times he was wrong. Frankly his hot book wasn't even that great - I'd read a Gary Keller book any day before I'd reread that.

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Eric Bilderback
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Eric Bilderback
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Replied Jan 17 2022, 22:03

I think the story that no one is talking about is the inflation of asset prices such as real estate.  If you look at it that way the appreciation in real estate is not that real estate is going up in value but the dollar is going down in value.  Because of the financial gimmickry the rich whom own assets are seeing those prices inflate.  The inflation that we are seeing in consumer goods has more to do with the Vaccine mandates and energy prices impact on the supply chain.

Kiyosoki does rub people the wrong way but I agree with his overall message that the rich getting richer through buying income producing assets with artificially cheap debt and that is how the system is set up work.  The middle class will continue to lose ground with 401ks and IRAs.  My guess is he feels the system is unjust and wants to shake people into waking up but he does come across as over the top much of the time.  

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Brandon P.
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Brandon P.
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Replied Jan 18 2022, 00:02

Inflation causes:

Monetary policy

Stimulus money

Low rates

Home owners pulling out money from

Their appreciation

Crypto gains

Amateur stock investors

Forgiven business loans

They are all interrelated

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Jonathan Stark
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Jonathan Stark
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Replied Jan 18 2022, 00:09

@Marcus Auerbach

Glad everyone is discussing these topics. I just setup and logged in today. This morning I proposed some of the same questions to my friend and mentor specifically about what will crash because of inflation and rising interest rates and what we could do to best position ourselves to be ready to capitalize on whatever opportunity presents itself. Big thank you to everyone sharing their thoughts. Keep it coming, great discussion.

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Marcus Auerbach#3 Starting Out Contributor
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Marcus Auerbach#3 Starting Out Contributor
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Replied Jan 18 2022, 06:36
Originally posted by @Trevor Murphy:

Bob, thanks for the thoughtful response applying your personal history & lessons and the actions you are currently taking.

Yes a 20-30% drop in the stock market would undoubtedly hurt in the short term and trigger a margin call for me.  I do have a contingency plan ready if that does happen.

But in the long term since I am in my younger 30’s I still have time to recover and add more to my portfolio over time. 

My main goal was to refinance the loan sometime in late spring, early summer when the value of the house and equity will be high enough to make it worth pulling the equity out and paying off the LOC completely.

My interest rate at the moment is a fixed 30 year at 2.9%. $524,000 left on the balance

My LOC interest rate is 4.25%. $134,000 owed back.

My next question is, we expect interest rates to go up over 2022.  *guessing and using “what if” numbers”

If the new interest rates are 3.25-3.75% in the summer. Would it still be favorable to refinance? Or Keep my current 2.9%

 The average consensus of expected mortgage rates (Fannie, Freddy, MBA) is 3.7% for the end of the year. We are already oupacing the forecast, I think we will see these forecasts being adjusted up rather quickly and would not be shocked to see 4.5% by the end of the year. Which histrically speaking is still a very attractive rate! That should take some heat out of the housing market. Right now we are seeing a mad run by buyers who want to close before rates go up. 

I'd hange on to the 2.9%.  

And keep a close look at the stock market and tighten up those stop loss limits!

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John Morgan
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John Morgan
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Replied Jan 18 2022, 06:37

@Marcus Auerbach

I was done with RE investing with 10 properties last year. But with inflation out of control, I decided to grab two more rental houses recently as a hedge against inflation. I’d rather park my cash in RE for obvious reasons. I don’t need anymore properties, but with interest rates locked in for 30 years being so low, it’s hard not to grab more properties. It’s like lenders paying me to invest money!

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Marcus Auerbach#3 Starting Out Contributor
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Marcus Auerbach#3 Starting Out Contributor
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Replied Jan 18 2022, 06:39

@Matthew Olszak - The ONE Thing is a fantastic business book, the MREA of course is a bible for agents. Gary's books on investing are okay, you can tell that's not where his mind really is.

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Marcus Auerbach#3 Starting Out Contributor
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Marcus Auerbach#3 Starting Out Contributor
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Replied Jan 18 2022, 06:50
Originally posted by @John Morgan:

@Marcus Auerbach

I was done with RE investing with 10 properties last year. But with inflation out of control, I decided to grab two more rental houses recently as a hedge against inflation. I’d rather park my cash in RE for obvious reasons. I don’t need anymore properties, but with interest rates locked in for 30 years being so low, it’s hard not to grab more properties. It’s like lenders paying me to invest money!

Agreed! I just pulled forward financing on a BRRRR I just closed on - usually we have it appraised after flooring is in and before we lease it out which will be in about 12 weeks. But that could cost me half a percent. Fortunatly my local bank knows me well enough to bend their rules a bit for me. I am limited to commercial financing at this point, like it or not, eventually that's the only way you can continue to grow. Shorter amortisation helps, and a solid equity position. But if you run projections with 3-7% inflation for 3 to 5 years that looks pretty nice. We just need wages and rents to go up as well.

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Trevor Murphy
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Trevor Murphy
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Replied Jan 18 2022, 07:06
Originally posted by @Marcus Auerbach:
Originally posted by @Trevor Murphy:

Bob, thanks for the thoughtful response applying your personal history & lessons and the actions you are currently taking.

Yes a 20-30% drop in the stock market would undoubtedly hurt in the short term and trigger a margin call for me.  I do have a contingency plan ready if that does happen.

But in the long term since I am in my younger 30’s I still have time to recover and add more to my portfolio over time. 

My main goal was to refinance the loan sometime in late spring, early summer when the value of the house and equity will be high enough to make it worth pulling the equity out and paying off the LOC completely.

My interest rate at the moment is a fixed 30 year at 2.9%. $524,000 left on the balance

My LOC interest rate is 4.25%. $134,000 owed back.

My next question is, we expect interest rates to go up over 2022.  *guessing and using “what if” numbers”

If the new interest rates are 3.25-3.75% in the summer. Would it still be favorable to refinance? Or Keep my current 2.9%

 The average consensus of expected mortgage rates (Fannie, Freddy, MBA) is 3.7% for the end of the year. We are already oupacing the forecast, I think we will see these forecasts being adjusted up rather quickly and would not be shocked to see 4.5% by the end of the year. Which histrically speaking is still a very attractive rate! That should take some heat out of the housing market. Right now we are seeing a mad run by buyers who want to close before rates go up. 

I'd hange on to the 2.9%.  

And keep a close look at the stock market and tighten up those stop loss limits!

Thanks for the response and the advice.  The 2.9% interest rate is very attractive and in my eyes a huge asset.  I definitely want to keep that rate but know at some point there will be a time when the equity is high and refinancing will be a more attractive option even if its into a higher rate. 

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Replied Jan 18 2022, 07:52
Originally posted by @Karl B.:
.... "Society won't be talking about how the Federal Reserve debased our currency due to the fact our clown government can't ever balance a budget..."
-----------------------------------------------------------------------
Actually, it was the Treasury Department that debased the currency, not the Federal Reserve. The Treasury devalued the dollar 40 percent in 1932 (dollars per ounce of gold went from $20+change to $35.00) and in the early '70s by an additional 9 percent or so.

Good article in the Economist a few issues back about whether inflation is a fiscal phenomenon and not a monetary one.

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John Morgan
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John Morgan
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Replied Jan 18 2022, 07:57
Originally posted by @Marcus Auerbach:
Originally posted by @John Morgan:

@Marcus Auerbach

I was done with RE investing with 10 properties last year. But with inflation out of control, I decided to grab two more rental houses recently as a hedge against inflation. I’d rather park my cash in RE for obvious reasons. I don’t need anymore properties, but with interest rates locked in for 30 years being so low, it’s hard not to grab more properties. It’s like lenders paying me to invest money!

Agreed! I just pulled forward financing on a BRRRR I just closed on - usually we have it appraised after flooring is in and before we lease it out which will be in about 12 weeks. But that could cost me half a percent. Fortunatly my local bank knows me well enough to bend their rules a bit for me. I am limited to commercial financing at this point, like it or not, eventually that's the only way you can continue to grow. Shorter amortisation helps, and a solid equity position. But if you run projections with 3-7% inflation for 3 to 5 years that looks pretty nice. We just need wages and rents to go up as well.

Yep, I’m tapped out with 10 conventional loans too so I’m stuck with these higher interest rate (4.375%) non QM 30 year loans. But that’ll still be below inflation the way our govt keeps printing money like there’s no tomorrow. RE is definitely a hedge against inflation! And if they appreciate a little and market rent go up, that’ll be icing on the cake.

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Jonathan R McLaughlin
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Jonathan R McLaughlin
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Replied Jan 18 2022, 10:59

"There is nothing more inflationary than a whiff of deflation..." I forget which economic nobel-holding wag said it, but we are seeing it in action. The 7% should be measured against 2 years of rapid and historic deflation due to covid, and a number of years before that of loose monetary policy following another deflationary event--TGRecession.

So I wouldn't panic yet, especially if you are holding on to real estate at good and longish term rates, where it is a GREAT inflation hedge. The Fed hasn't even really started raising rates yet, they are still tapering bond purchases. And I can remember when people were dancing in the streets celebrating 6% interest.

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Luka Milicevic
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Luka Milicevic
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Replied Jan 18 2022, 12:07

I think about inflation daily....

I said this back when we started with the CARES act or whatever it's called. The whole $4t stimulus package...

I said once that money has been spent, and it wont take long, what we will be left with is rampant inflation. A lot of my friends have now said I have some sort of crystal ball as I predicted this exact thing happening. I don't have any sort of crystal ball, I just have a knowledge of economic history. Take any country, at any point in time and look at the correlation between money printing and inflation....it's the same at any point in time. 

The whole 7% inflation number is also a complete and utter JOKE. Nothing has gone up only 7%. The cost of basic material for renovations has gone up over 25%. My most recent example is paint thinner that has increased 24.3% at Lowes since I last bought it just 3 months ago!!! I don't even have to comment on building materials that have tripled in cost.....

I think the impact on RE is that it's going to create more renters. Home prices will stabalize and not rise in the double digits, but they aren't going to come down at a pace where your average buyer is going to be able to comfortably afford. 

Even if we do have a crash (defined as 20% or more), well that's just going to put us back to Feb 2021 prices....

I am invested in assets, heavily, and so inflation is going to boost my asset prices (historically speaking), but the folks at the bottom and middle class that are seeing prices of everyday items increase while their pay stays the same....they are going to be HURTING and I think about them a lot because it SUCKS.....but hey, at least the powers that be got to hand out a ton of money and show us all how they are helping....

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Bob E.
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Bob E.
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Replied Jan 18 2022, 13:33

I watched a YouTube podcast the other day by someone who calls himself the "Uneducated Economist".  He is on the west cost and works selling lumber.  He was saying how he has small builders with units in progress that can't get roof trusts and how lead-times for windows and other material have been pushed out.  Overall it sounds like a nightmare trying to complete a house right now.  

All of this is going to slow the pace of new units coming on to the market.

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Bob E.
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Bob E.
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Replied Jan 18 2022, 13:57

Ran across this article in todays Epoch Times.  Hopefully it is not paywalled.   How Inflation Is Being Understated and Why What’s Coming Is Worse Than Expected

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Jeremy Trad
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Jeremy Trad
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Replied Jan 21 2022, 09:09
Originally posted by @Marcus Auerbach:
Originally posted by @John Morgan:

@Marcus Auerbach

I was done with RE investing with 10 properties last year. But with inflation out of control, I decided to grab two more rental houses recently as a hedge against inflation. I’d rather park my cash in RE for obvious reasons. I don’t need anymore properties, but with interest rates locked in for 30 years being so low, it’s hard not to grab more properties. It’s like lenders paying me to invest money!

Agreed! I just pulled forward financing on a BRRRR I just closed on - usually we have it appraised after flooring is in and before we lease it out which will be in about 12 weeks. But that could cost me half a percent. Fortunatly my local bank knows me well enough to bend their rules a bit for me. I am limited to commercial financing at this point, like it or not, eventually that's the only way you can continue to grow. Shorter amortisation helps, and a solid equity position. But if you run projections with 3-7% inflation for 3 to 5 years that looks pretty nice. We just need wages and rents to go up as well.

 Would love to get connect with another rockstar LO in the Milwaukee market! I have a rehab going on a 4 family and will be looking to refi in Sept/Oct/Nov.

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Michael K Gallagher#3 Commercial Real Estate Investing Contributor
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Michael K Gallagher#3 Commercial Real Estate Investing Contributor
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Replied Feb 15 2022, 08:51
Quote from @Bob E.:

@Trevor Murphy  I would rank urgency of paying down margin in relation to how much of your margin is being used and how much you have left.  Think of it this way, if the stock market dropped 20%, 30% would that impact you?  Remember 2008-09 how big the market drop was.  I was using more of my line than I was comfortable with so we started working on a cash out refi to replace the variable rate debt with fixed rate.  We are supposed to close tomorrow, fingers crossed.

Also, It seems highly probably that the next recession will start in 2022.  While I do not know what will happen to RE prices in an environment with high inflation and increasing rates I am confidant that the next recession will create opportunities somewhere.  If you are using a small amount of margin, what is available will be there to take advantage of those opportunities.  in 2000 tech stocks crashed, creating a huge opportunity to buy Amazon, Yahoo  and other tech stocks.  Some had huge upside combining off those lows (yahoo not so much).  in 2007 there was a huge opportunity to buy housing.  Who knows what the next bubble will be to pop but being liquid when that opportunity presents itself will let you brag in 10 years about how you bought at the bottom.  Not everything has to be real estate, if Cryptos are the next crash maybe I will buy some and then sell in a few years and buy RE.  


 This is a great view!  thank you...guess I need to finally understand what in the heck crytos are!

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Jake Soper
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Jake Soper
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Replied Feb 15 2022, 13:29
Quote from @Eric Bilderback:

I think the story that no one is talking about is the inflation of asset prices such as real estate.  If you look at it that way the appreciation in real estate is not that real estate is going up in value but the dollar is going down in value.  Because of the financial gimmickry the rich whom own assets are seeing those prices inflate.  The inflation that we are seeing in consumer goods has more to do with the Vaccine mandates and energy prices impact on the supply chain.

Kiyosoki does rub people the wrong way but I agree with his overall message that the rich getting richer through buying income producing assets with artificially cheap debt and that is how the system is set up work.  The middle class will continue to lose ground with 401ks and IRAs.  My guess is he feels the system is unjust and wants to shake people into waking up but he does come across as over the top much of the time.  

Ding Ding Ding. This is a huge part of the equation some people seem to be neglecting. The dollar is losing value across the board, regardless of the fact real estate inventory is still lower than demand. Putting the worlds economy on pause while we all sat inside for months is turning out to have some serious repercussions, despite the incessant claims of 'transitory' inflation. We all knew that was BS. Someone has to pay the piper, and we're all paying it everyday, 7.6% at a time. 

agreed about kiyosaki, if you read the first 25 pages you'll get the general concept and hopefully have a lightbulb moment. Dont follow his path though.