Suppose we have stagflation....

4 Replies

Apologies if there's already a thread on this....

Suppose growth slows and inflation pipes up in the coming years, giving us stagflation again. What will the effects be on real estate investors? How well did the older bigger pockets members do during the last time this happened in the 70s and 80s? Any tips on how to prepare for stagflation, should it come again soon?

For rental properties:

Presumably interest rates will rise, which should depress housing prices and possibly rents. So do we sell now when prices are high, figuring that we can buy back in later at lower prices? Do we refinance now while prices are high in order to pull out as much equity as possible for more purchases while rates are still low? Do we pay off loans to improve our balance sheets and cash flow by retiring debt?

For flipping:

Was flipping easier or harder in the 70s and 80s than it is now? Should we expect more or less of this activity under stagflation?

@Bob Renthammer

What do you see that could a causing a supply shock or may cause the gov to increase regulation/monetary policy to the detriment of growth? 

I guess maybe the tax cuts and their affects on the debt COULD fulfill the later requirement, but I'm more inclined to believe that would lead to an economic slow down and not stagflation. To much debt, higher risk premium for fed bonds ... 

 I haven't put a lot of thought into it, but I can't see a huge swing one way or another in anything like oil that impact the whole market.

This posttalks about inflation. 

Though this seems counter intuitive, interest rates do not really have an effect on residential property values.  Robert Shiller's research is largely based around this.  What happens to consumers buying habbit's for properties as rates go up or down, is that the buyer moves up or down in price point, but so do largely the buyers who can afford less or more than a specific buyer.

@Bob Renthammer

Yes. Stagflation would be generally bad. Certainly at the supermarket.

But, it's not that simple.

Interest rates are artificially held low. So, they are not directly tied to inflation rates. Banks are overflowing with cash reserves.

The problem is that housing inventory is extremely low. New housing starts have suffered due to a lack of labor that left at the end of 2009-2010 market downturn.

Prices are based on supply and demand, not interest rates.

Rising interest rates will increase the cost of ownership, but it won't be able to change the supply problem.

Those that can afford it will continue to buy at the maximum of what their wages will afford. Those that can't buy now or at the margin will have to buy sometime else that fits their wages or not buy.

If wages are part of the driving forces behind a rise in inflation, then consumers and investors will still continue to buy at the limit of their income. Thus, continuing to drive up home prices in a market with tight inventory.

Rents will continue to rise along with the cost of housing, thus attracting investors.

hard money charges 12%-15% for flips. Doesn't deter investors.

Interest rates hit highs of 18%-19% in the late 70's and early 80's. People still bought real estate.

Stagflation will only be a problem if wages are flat to negative in the face of rising costs to consumers.

@Bob Renthammer

What you ask is something of a paradox.

Stagflation takes place with rising prices and no growth. 

That said,

inflation will destroy the purchasing power of the dollar. Interestingly enough people will most likely shift

money away from real-estate and into TIPS or something that is protected against inflation.

In my view you are faced with the decision:

purchase a house with falling prices and rents (due to the recession that would follow), or put your money

in something that protects the principal value against inflationary pressures.  To the point made above,

people have to eat, but they also need a place to live.

Per these stats, while rents rise on average they still fall behind the rate of inflation.

curiously enough the prices for housing changed faster than the rate of inflation:

great conversation topic.

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