Don’t worry; I’m not going to write a thesis on the impact of inflation on real estate, though I probably could. And to give credit where credit is due, I gathered the idea for today’s blog, from Larry Kudlow on CNBC.
Yesterday’s inflation protected bond sale (ones that adjust the yield return when inflation rises, also referred to as TIPS), sold at a negative premium. Huh? Put another way, investors paid more for an inflation protected bond, than the face value. So ask yourself this, why would a savvy investor pay a premium for a low yielding bond that protects against inflation when all the talk is about slow and negative growth and declining prices and deflation? The answer simply put, is that as the Fed continues to pump and print cash to stimulate the economy, dollars are going to be worth less, thus everything will take more dollars to purchase. This is inflation.
So what has this to do with real estate? The concept is really pretty simple: if prices rise on goods and services (think Starbucks, toilet paper, gold…), then prices rise for the one asset class that truly cannot be created or discovered or manufactured: land. While it may appear right now that we have a surplus, an excess of inventory in homes and commercial real estate, the reality is for most markets, that when the economy improves and employment picks up, housing and real estate will be poised to do the same – a rising tide raises all boats. So the question is, if bond traders are buying a hedge against inflation with TIPS, isn’t it time to start hedging and buying real estate too?
real estate too?