I came across this old post, written over six years ago on my old weblog:
Inflation continues to fall as buyers keep the pressure up on sellers. This also means that a 3-4% wage increase this year and a 10% increase in housing prices will have a major impact on real personal income and wealth. Another three years of this and we will have replicated the gains in real personal wealth over the last two decades (for most Americans — this is in contrast to the rapid stock market driven gains over the last 20 years for the nation’s wealthiest individuals). Nice. [John Robb’s Radio Weblog]
There are some problems with this theory. The most glaring is that he’s treating inflation as synonymous with some vague statistic about consumer prices. In fact, inflation is an increase in the supply of money–this may lead to an increase in prices, or it may not, depending on other factors. The US has been inflating its money supply for years without prices going up much, because we send the money overseas to pay for import goods. That can only work as long as overseas sellers are willing to accept the dollars (or have no choice).
The housing price increase is the result of another bubble. The Federal Reserve is still inflating the money supply, but now instead of the money going into smoke-and-mirror “dot com” stocks, it’s going into real estate. This is bad for anyone buying a house now, because when the bubble bursts, they’ll be stuck with a house worth less than what they paid for it, but their mortgage payments will reflect the inflated price.
To me, that’s even worse than losing money buying lottery tickets disguised as stocks. At least you can just accept your loss and move on, instead of being stuck either making excessive payments for 30 years on a house or else going through the hassle of selling it at a loss.
When I wrote that, it hadn’t occurred to me that those house buyers could legally walk away, but as it turns out they could.