An unpopular opinion on the direction of US inflation and housing

[AJ Wong]

Don't look now but money supply is still up, way up, from a historical perspective. 

The net effect on the US dollar will be a continued decline in purchasing power. 

Those that thought the 'worst' of this phase of economic transition was behind us will be sadly mistaken. 

It takes machismo to say this confidently, but let's look at a fact:

- Energy prices are the backbone of all economy. Oil prices are up nearly 35% on the year and with the recent production cuts there is the potential for a 3M barrel per day shortage beginning Q4 2023 and for oil to reach $150 per barrel. 

This will have dramatic and in some areas catastrophic effects on earnings and the overall consumer economy. 

From a very high level the quality of life for the average American in particular is likely to decline as there is less appetite for US originated debt and treasuries. 

Let's be real, the US government spends more on Social programs, defense and interest on the existing debt than it takes in via taxes.

The US government runs a fiscal deficit, and to cover its liabilities has created an oversupply of dollars. 

These dollars are in the process of being worth less...not worthless, but potentially so. 

Hyperinflation is a buzzword that is a lot closer to reality than the '2%' target (which, by the way has no historical precedence or purpose but that is for another forum...) 

The present concern for most 'economists' or people for that matter, is what if our dollars really do continue to decline by 5-7-10%? It means that those that have been most successful are at the most risk. Or that those that have successfully saved capital (in the form of cash or equities) have the most to lose. 

The official CORE CPI disregards housing and food, which apparently to the government metrics, is not a true measure of cost of living. Actually it's a more accurate representation, but according to them, we're currently at a 3-4-5% inflation rate. So for those of us with any significant savings, let's say $500,000+ can anticipate a loss in buying power of $20-25k in the next twelve months. Compound this by multiples and you can see that the top earners and savers have the largest incentive to invest..errr..spend their capital quickly and efficiently. 

Historically, the best investments during times of high inflation are hard, tangible, real assets, commodities or businesses. Precious metals, art, commodities and many asset classes of real estate. I personally have been 'hedging' or divesting away from dollars from sometime, and am long RE and hard commodities, particularly silver, gold and developable land in both the US and Mexico. 

Now how does this all relate to housing and investing? Well, as a licensed mortgage broker and in lending since 2004, I've recently delved back into the mortgage space full force with a long time associate. What I can tell you is that rates are not great but that there is an abundance of mortgage capital and with ever broadening and creative delivery methods and terms. 

It's not quite two or three year interest only NO DOC ARM's but there are hundreds (if not thousands) of mortgage banks and correspondent lenders that are very actively lending. DSQR loans, no ratios, limited income, foreign nationals, bank statements, one year CPA letters, P&L statements, banks are finding ways to get the capital into markets. And markets follow the money. Where else is it going to go? The stock market is trading at 20-30-40 times earnings..

Combine these two economic conditions, the decline value of savings (and the impetus for those with significant amounts to convert it) with the mortgage liquidity in the market and we have the makings for a bull housing market. 

The smart money, like Warren Buffet's recent billion dollar bet on housing builders, is on real estate. 

Once there is a realization on Wall Street that inflation is here to stay, and the equities bubble pops, there will be a flood of capital into hard assets. Certainly, if the decline of a dollars value accelerates, so will the demand for real assets, most notably cash flowing or prime real estate. 

I have already seen the strongest demand in my 20 year real estate career for luxury and high quality vacation rental properties here on the Oregon Coast and beyond. Even with mortgage rates at 7-8% interest rates, there are multiple offers and competitive price wars on premium coastal real estate. 

The cost of everything has and will continue to increase, why would we expect housing to be the exception? 

What are your thoughts on the direction of inflation and the housing market(s)?