You’ve got money to invest. What should you do? Maybe buy a house cheap in today’s bad real estate market.

But why is it a bad market? Before the bubble it was common to pay 8 or 9% for a mortgage. If you have $1000 per month available to pay the mortgage you could handle a $130,000 mortgage for House X. But if the bank lent you the money at 4% you could handle a mortgage of $210,000. What happened in real estate is the mortgage rates went down and people discovered they could buy a more expensive house for the same monthly payment, so they started buying a more expensive house – HOUSE Y. And the market responded by raising house prices. Eventually prices rose to a point where the only house you could buy for $210,000 was House X. That’s where we are today. So what happens when mortgage rates go back up to 8 or 9%? The opposite. Prices of homes collapse downward.

So why would mortgages go up to 8 or 9%? A home loan is a long term loan. Someone is holding the mortgage for 30 years before its paid off. How would you feel about lending me money at 4% if inflation is running 6% per year? You should feel stupid. You lent me $1 Million of buying power today and over the next 30 years you’ll receive money which has the buying power of about $600,000.

Lenders have to lend at a rate above what they think inflation is going to be over a 30 year time frame or they get screwed. Instead of making money on the money you lent me, you’d be losing it. Bankers don’t get all those nice bank buildings because they are stupid. If we are going to get inflation, we are going to get high mortgage rates. And real estate is going to go nowhere.

Now go play. Phil Town