How would devalue of the US dollar effect realestate?

Question

It looks like were in the beginning stages of the rest of the world pulling away from using the US dollar. What effects do you think it will have on real estate currently owned and realestate you purchase in the future.

Here's a link to an article where China and Russia have agreed to no longer use the US dollar for trades between them selves.

http://www.ibtimes.com/china-russia-currency-agreement-further-threatens-us-dollar-248338

Matt Laird · Answer

Great discussion, @Mitch Dowler I couldn't agree more.. I was 100% debt free with a small pile of paper assets before I started researching the stimulus and hyper spending of the government... Once I convinced my wife that debt was cheap and less risky than holding cash (took some serious negotiating) we have started leveraging out 20+ year fixed loans on cash flowing properties..

Matt Schelberg · Answer

There are factors that concern me more than a deal between China and Russia.  Plus, that article is from 2010.  The author lost me when he wrote, "In fact, some allege that the U.S. wants to protect this [currency] status so badly that it invaded Iraq because the country began selling oil in euros instead of dollars."  Huh?

I am more concerned about the effects of quantitative easing.  We are in uncharted territory and no one knows what consequences current policies will bring.  A period of high inflation with interest rates above 10% would definitely have a strong effect on the real estate market.  Kinda makes me want to ask a realtor who survived the market of the early 1980s.

J Scott Hamilton · Answer

In the context of currency and real estate, there is a lot of confusion between the terms appreciation, inflation, and devaluation. I experienced all three while living in Argentina in the late 1970s when the country was going through hyperinflation.  I'll explain all three in context of the US Dollar (USD) and local real estate.

Inflation is a measure of the decrease of a currency's purchasing power for local goods and services.  Devaluation is the lowering of an exchange rate of one currency for another currency (or multiple currencies). Appreciation is the increase in a property's price that results from inflation and possibly a rise in the underlying value of the property (what stock investors call "alpha"). These three things are all very different but can also all affect real estate prices.

If the USD devaluates, it causes no immediate effect on housing prices. Each market has to decide if RE prices has to rise in the case when expatriated dollars return to the United States to start buying up property. I have seen a statistic somewhere that SFRs generally only rise in price to track average inflation, they don't rise to much from intrinsic value appreciation.  But if you are in an improving neighborhood, you may see price appreciation that has nothing to do with inflation. The same can happen with price depreciation in bad neighborhoods, inflation notwithstanding.

But to answer the underlying question of what happens if the USD loses reserve currency status? We saw this happen to Britain when the Pound Sterling was replaced by the US Dollar.  The economy went into a stall, and the pound lost more than half its value against the USD (so, true devaluation). But that didn't mean because Britain got "cheap" that housing prices necessarily got better. The United States is in an even worse situation. We are approaching 20 trillion in expatriated dollars in the form of treasuries. That which is held in foreign currency reserves won't find a home in real estate.  But the private petro dollars may start seeking that as a home. More than likely you'll see it go into high ticket items like big buildings in New York city and comparable investments. Donald Trump might make a killing, but the rest of us won't.  Instead if the USD dramatically devaluates, you'll probably see that Americans will find life far more expensive for their goods and services, and there won't be enough purchasing power to support high housing valuations. We may be in a very odd situation where some properties rise dramatically, while other properties deflate because few people can afford to be buyers. It will be interesting to see the results.

Scott

Mark Scott · Answer

I'm new here but the common wisdom that having debt on a property and then having someone rent/mortgage it from you will protect you in a dollar devaluation seems wrong.  The flaw in that theory is that the renter (or purchaser) must be able to continue making the payments - which many won't be able to do since their income has shrunk in terms of buying power for necessities.   Then you are stuck with a property needing a certain level of debt service when few will be able to make the payments.  Wages in terms of dollars  will be much less and property values will decrease.  So while the idea of continued payments sounds good - the reality of the situation may not be good at all and you could get stuck with property that you can't service the debt on.

Of course if you own the property outright, or seller financed it free and clear -- that's another story.

Mitch Dowler · Answer

Devaluation of currency is also known as inflation.  As you know our U.S. currency has no actual intrinsic value, it is a fiat currency based on the full faith and credit of the United States government.  A faith and credit that is in steady decline.  The good news is inflation can work to the benefit of real estate investors.  If you attach debt service with a fixed interest rate to the real estate that debt is locked for 30 years.  No matter how much our currency devalues during that time the debt service and payment remains the same.  Meanwhile the value of the property as measured by the fiat currency will increase.  The rents you collect will also increase as the currency devalues.  Jason Hartman calls this "Inflation Induced Debt Destruction".

Account Closed · Answer

The devaluation may cause foreign direct investment and inflow of foreign money into many sectors to increase (including real estate). That may then alter demand and supply within the sector (total demand and inventory levels). Prices consequently may start increasing.

Some of the  real estate price patterns in Canada (Vancouver, Toronto etc.) is attributed in part to increased foreign investment activity in the real estate sector there.

Also, companies in the real estate sector that have to import equipment, materials or input of any sort in the normal course of their business, would have to spend more per the devaluation.

The increase in 'cost of good' as a result of the devaluation would be transferred to the buyers and reflected in an increased real estate price.

Account Closed · Answer

If the value of the dollar (or any currency) devalues (or gets devalued) compared to another currency (and there are many reasons why a currency devaluation could occur -- internal fiscal crisis, external market forces etc.), there might be pressure for real estate prices to escalate. There are however also grander effects to the economy as the value of international trade between nations each year is often substantial.

J Scott Hamilton · Answer

During a currency (dollar) devaluation, there are two factors that come to mind that would drive real estate prices up. One has to do with dollars outside the United States coming back to the United States, and the other has to do with another currency that decides to go bargain shopping.

Let's say you are Japanese, and you have both dollars that you earned in a foreign investment, and yen available to also make an investment. You want the best rate of return on your currency, and you find that the local market doesn't provide you a good rate of return. Your dollars start to devalue, meaning that they will buy fewer yen. A weaker currency (dollar) is one you want to unload, and you can do so by either exchanging them for yen or buying something denominated in dollars.

There is no doubt that if devaluation is an ongoing process you'll need to dump the dollars, as any investment whose face value in dollars, such as bonds, will continue to lose its value and offset any gains that might be had from the interest coupon. So an investment whose value is determined by ongoing auction, such as stocks or real estate, makes a good vehicle for your devaluing currency so long as there are market forces to drive the price up. For now think of investing dollars instead of exchanging dollars as a gamble -- the first factor.

The second factor is that when a nation's currency becomes worth less, the value of the goods and services of that nation start becoming a lot cheaper to a foreign buyer. This is why it is good for that nation's exports, because exported goods become less expensive relative to the same goods on the global economy denominated in a stronger currency. This is not only true of exported goods but also of any assets you as a foreigner are allowed to purchase inside that currency's country.  Real estate is an odd one in that many countries do not allow direct foreign investment, but the United States does allow it.

So with the first factor, those dollars held by a Japanese person are trying to find a home in real estate, so it begins the bidding up process.  And with real estate become cheaper from the perspective of the purchasing power of yen, it would make sense from the second factor perspective to exchange yen for dollars and then use those dollars to also buy real estate. So long as the real estate appreciates as fast or faster as the dollar devalues, the yen investor will break even on their yen investment. And as long as the rents increase in line with an underlying property appreciation caused by the effect of more dollars entering the real estate market, then increased cash flow will offset the loss in value of that cash flow being denominated in dollars.

Many foreign investors will just use the intrinsic value of the property rather than try to play the exchange rate game. So with the Japanese investor, assuming would want to live anywhere in the world, it might make more sense to have a penthouse apartment in Manhattan over one in Tokyo, or to have a vacation home on US lakefront property over a villa in Italy.

So while the exchange rate differentials may cause an increase price pressure on real estate in general, not all markets may necessarily be affected. Just as US exported goods become cheaper, foreign goods become more expensive. So an American who is used to cheap Chinese imported goods with a strong dollar will find that their trip to Walmart becomes much more expensive. If their budget is strained by buying imported goods (and for now assume oil is also priced as an imported good) they will have less money to afford on housing. So real estate that is of interest to an American but not to a foreign investor may find its value decrease, not increase during devaluation.

With as many dollars as the US has overseas, if the the real estate market were perfectly efficient, then perhaps all real estate prices would increase as those dollars try to find a home back in the US. But since it is not, you are likely to see the most desirable properties become the most inflated, and the least desirable properties breaking even on value or possibly even deflate.

Scott

Mark Scott · Answer

If the value of the dollar (or any currency) devalues (or gets devalued)  compared to another currency (and there are many reasons why a currency  devaluation could occur -- internal fiscal crisis, external market  forces etc.), there might be pressure for real estate prices to  escalate.

Why?