Is Inflation Inevitable – At Some Point!

When I was in high school, I had a savings account with $20k, I am a saver. I went to deposit more money and the teller said I should put this in a CD. That CD was earning over 20% in interest. I thought that was awesome, but in the 80s, inflation was out of control. When I went to buy a house in the 90s, the interest rate on our loan was 8.5%. I didn’t think much about it as I didn’t know any different. Below, I’ve shared a portion of a blog from Jay Vorhees at JVM Lending with his thoughts on inflation:

He currently thinks much less on inflation and considers deflation/recession a possibility in the near term (over the net 6 to 24 months) like he discussed in a recent blogs, including this one, his Car Wash Indicator and Scary LinkedIn Indicator. My personal favorite is the Car Wash Indicator.

But after the next one to two years, all bets are off, as prices are likely to surge everywhere for several reasons.

1. Commodity Prices Will Surge:  The world is facing massive energy and commodity shortages due to a lack of investment over the last several decades, and it will take decades more to replenish supplies and/or to find alternatives and thus we will see massive resource shortages. 
2.  Labor Shortages. This is something author Peter Zeihan addresses often, as the largest generation of workers in American history is now retiring en masse, and that will foster a labor shortage that will drive up labor costs and prices overall.
 3. Monetizing Debt.  America’s overall debt load is 3.7x GDP right now, and that there is no way we can pay it off. Our Federal debt alone ($30 trillion) exceeds GDP ($25 trillion), and when you couple that with all our state and local debts and, worse, our unfunded pension, social security, and Medicare liabilities (over $100 trillion) – we are screwed. The only way we will pay off all that debt is by effectively printing money or conjuring it out of thin air somehow – and that will result in massive inflation.

Jay goes on to mention that one of the best inflation hedges is real estate, which he likes best because it generates income while appreciating, has a history of good performance against inflation, and more. That’s where my two cents come in!

I believe now or in the near future is a good time to buy. We are in an odd transitioning market. Some homes are selling for about 1% less than asking and may have had a price reduction and homes are sitting on the market longer. Then around the 17-24 day mark, a couple of buyers make an offer. Other homes are selling for more than list. It depends on location, condition and where the listing agent was able to list out the gate. If rates go back down, you will see more buyers in the market, multiple offers and prices increasing. If rates go over 6% and continue going up, then prices will come down, but the higher rate erodes your price point. If you are looking to buy, buy now and if the rates go down you can refi. If rates go up, you will be glad you bought when you did.

Why higher interest rates are good

This may surprise you, but higher interest rates aren’t always bad! In fact, sometimes they can be really good for the real estate market. Jay Vorhees at JVM Lending gives us some good reasons why. I’ve summarized those points below with commentary.

After the most recent presidential election, interest rates went up 3/8-1/2%, and the real estate market seemed to come to a standstill. It scared everyone into thinking that higher rates would severely impact the market overall. But, it was really just “uncertainty” that kept everyone on the sidelines, and not the higher rates.

Rates might continue to rise, but that’s a good thing, and here’s why:

  1. Slowly climbing rates often push would-be home-buyers off the fence. Higher interest rates heat up the market by pushing people to buy sooner, rather than later.
  2. Higher rates give the Fed “ammo” for the next recession. One of the Fed’s most powerful recession-fighting tools is lowering rates. But, if rates are already low, that tool becomes worthless. To restore the power of this, we need higher rates.
  3. Retirees and savers get higher returns. Artificially low rates that benefit big banks and borrowers hurt savers who live off of their savings. The higher the rates, the better for retirees and savers.
  4. Banks lend more money with high interest rates. There is a much better incentive to lend when rates are higher. More economic growth, higher wages and more home-buyers result from higher rates, too.
  5. Stronger dollar and continued tamed inflation. A stronger dollar makes traveling abroad cheaper, investing in the U.S. more appealing, and importing goods cheaper. Higher rates also keep inflation in check for a variety of reasons.

Higher rates hurt mortgage companies that rely on refinance business instead of purchases, and it hurts home-buyers to the extent that their payments will increase.

But the payment factor is often overstated. A rate increase of 1/2% might push a payment up about $150 for a $500,000 loan. That is real money, but it won’t break the bank for most of our borrowers whose income is well into the six-figure range.

What are your thoughts and how would higher rates affect you directly?

Why rates went down after 4th Fed increase?

My friend Jay Vorhees at JVM Lending wrote another interesting end-of-year blog recently, regarding rates. Despite the Fed increasing rates for the 4th time in 2017, they are still down. Why is that, and how does it affect you?

In Jay’s blog, he notes that 30-year fixed rates have fallen 1/4 percent over the last year even though the Fed has done four increases. On that note, he asks why the Fed’s rate increases don’t push up mortgage rates?

In response, Jay gives two main reasons:

  1. Short-term rates don’t always affect long-term rates
  2. Many factors (besides the Fed) influence rates

Inflation, geopolitical strife, economic news and demand for credit and bank loans are the other main factors named by Jay. Most of those are very relevant in today’s societal and political climate. Basically, the Fed helps influence rates, but isn’t the sole influencer – if investors are pushed out of stocks or bonds into the other, due to war, a poor week on the stock market, etc., rates will change just as rapidly.

So, what does this mean for you?   Rates are going to continue to fluctuate. They are still low, so if you are considering buying, it might be a good time to get off the fence and make a move in 2018!

How rate increases affect your payments

We’ve seen rates increase since Donald Trump won the election. Now, the Fed is saying they’ll do three rate hikes instead of the expected two in 2017. This caused rates to bump up about half a percent. What do interest rate increases mean in regards to a buyer’s payment and the overall market?


According to The Wall Street Journal, if we adjust for inflation since 2006, housing prices are actually 16 percent below their 2006 peaks in most areas.  Many economists are saying the demand for housing remains as strong as ever and that recent rate increases will have a minimal effect.

However, people usually make home purchases based on payment. So as interest rates increase, somebody thinking of purchasing should know a 1/2 percent increase in rates for a $500,000 loan, increases the payment about $140-$150 (and even less after “tax benefits”).


Should buyers and borrowers wait to see if rates fall before moving forward with transactions? Jay Voorhees of JVM Lending says absolutely not. Borrowers can easily take advantage of no-cost refi’s if rates fall.

And, as Gary Shilling wrote in a Forbes column on Dec. 6, he thinks the markets massively overreacted to Trump’s election. He points out that the root causes of weak economic growth (that have kept rates low) will remain. He also says that Trump’s proposed tax cuts and stimulus programs will be watered down by Congress; the expectations of an economic boom are overblown.

What do you believe? Are you bullish or bearish? This election reinforced the notion that nobody has a crystal ball and sitting on the fence waiting for one outcome or another may be the worst thing you can do.