They say cash is king but does that hold out in a high inflation environment that is forcing a strong seller's market into a sharp 180 degree turn into a buyer's market?

With the Fed continuing to push up interest rates (another .75% rate hike today 11/2) and related 30 mortgages for retail buyers at or above 7%, buyers have taken a large inhale and are firmly sitting on the fence with sales volumes dropping 80% in some of our local zip codes from 6 months ago. 

Seller's are starting to realize all of the retail first time home buyers have been priced out of the market in terms of interest rates which means there is more pressure on rental availability since those first time home buyers will continue to either live at home or go find a rental.

In my local market, saw an example of a seller dropped their list price $75,000 to get more in line with the current market. Don't feel to bad for them, they bought it for $92,000 back in 2000 so will still make plenty of money when they find the right buyer

So that goes back to the question. If I have cash, do I hold it or do I take advantage of a good deal that produces cash flow even if there is a chance the market could decrease another 10-15% over the next 1-2 years?

Using $400,000 as a round number and more than enough to buy a single family home in my local market (Tucson, AZ) let's run the numbers

Scenario one: Hold cash

In 5 years, that cash will be worth assuming inflation stays at 8% for the next two years, drops to 6% in year 3 and evens out at 4% for the last 2 years

Inflation is relentless and your principle will be whittled down to $290,000 for the sake of round numbers but you will have it - still liquid. Essentially the leaky bucket strategy. 

Scenario two: Invest into a long-term rental

Let's assume the market drops 10% AFTER you buy it in year 1, then drops ANOTHER 5% in year 2, holds flat and then comes up 3% for the last 2 years. Plus, you will be making a conservative 7% real return AFTER management fees etc. Essentially you are replacing the bank and capturing the returns they are trying to charge the retail buyer. 

After 5 years, your principle is at $360,000 AND you have $150,000 of cash in the bank from the 5 years of rent for a total valuation of $510,000. Principle hasn't just been preserved, you have GROWTH. 

The opportunity is for cash investor becoming the bank and taking some of the action that lenders can't convince the first time home buyer to do.

This option is best for the passive investor who is no longer chasing growth and leverage but would rather have security and true asset diversification as the stock market continues to go on quite the ride as it waits for the Fed to tame inflation.