Here’s an easy read commentary on inflation & real estate I enjoyed this morning. The Four Horseman of Real Estate. Animated articulation.  -RR

Inflation on the Horizon? by Dennis Torres
As the government prints trillions of dollars, currency may become devalued.

About three years ago, I was invited to sit on a panel of real estate experts at a conference organized by Pepperdine University’s business school. I spoke of an impending housing market collapse, citing my belief that we would soon see home values decline 35 percent to 40 percent.

I wasn’t too popular that day, yet I felt compelled to share my educated opinon. As a real estate professional for 35 years, I had already seen two major residential market downturns, one from 1979 to 1980 and another from 1989 to 1990. In the overheated 2006 market, I was sure I recognized the signs of another impending slump. Central to my argument was that the housing market, like most industries, is cyclical. Surprisingly, my fellow panelists, who represented some large lenders and real estate franchises, strongly disagreed with my predictions. They all stuck to their conviction that the housing market was going to remain strong in the next few years—or, at worse, decline 5 percent to 10 percent. They subscribed to the popular slogan at that time: “soft landing.” I called it wishful thinking.

Four Horsemen of Real Estate
I spoke of the coming four horsemen of the real estate market apocalypse. The first horseman we have already seen: the collapse of the subprime loan market followed by losses in the prime mortgage market. RealtyTrac reported 3.2 million foreclosure filings last year, an 81 percent increase from 2007. Projections for this year have not been much brighter, though the passage of economic stimulus legislation offers hope for market stabilization.

We’re currently dealing with the next two horsemen, and they continue to be a huge drag on the market: high unemployment and burdensome consumer debt. The U.S. unemployment rate has been steadily climbing, reaching 8.9 percent in April, the highest level in 25 years. Without a job, consumers are less likely to pay their bills, including mortgages. Meanwhile, consumer debt is piling up; U.S. consumers carry $900 billion in credit card debt alone, according to the Federal Reserve.

The fourth horseman is still on the horizon but is quickly moving our way: rampant inflation. The reasoning behind my prediction is basic economics. Our government cannot print trillions of dollars to pay for wars and various industry bailouts without devaluing the worth of the dollar. In addition, it’s been quite a while since our country has experienced high inflation; in my opinion, we’re overdue.

Price Appreciation
How will this affect the real estate market? It will become more difficult for consumers to afford a home, since wages seldom keep pace with inflation. In times of inflation, the price of durable goods such as housing rises dramatically. But this will benefit the market, too. While higher home prices may deter some buyers, others will rush to purchase at a time when prices are appreciating. And home owners will be happy to see the value of their home go up.

It’s also important to note that unlike the “bubble” of our recent past, in which property values rose quickly in large part due to speculation, inflation will not lead to a housing market collapse because prices will be based on the intrinsic value of the then-current dollar.

So, what good is a forecast without a time line? Here’s mine: I see inflation taking hold within two years. The housing market will continue to decline through 2009, then home prices will stagnate for three to five years before climbing again around 2015. I say this with great humility, knowing that in times like this, with so many unforeseen variables, accurate predictions can be a moving target.  -JUNE 2009

Dennis Torres, a licensed California real estate broker, oversees Pepperdine University’s real estate strategies as director of real estate operations. Torres also serves as the university’s adjunct professor of negotiation and dispute resolution.