Could real estate be safer than a savings account!

[Lesley Resnick]

I am a big believer in the old saying, “the trend is your friend”. I do not try to predict where something is going, just identify it as its happening, and act on it accordingly “This neighborhood is better maintained than it used to be”, could be a leading indicator of price appreciation. With that said, how can real estate be safer than a savings account?

It is actually quite simple based on the economic policy that our government is following. This is not a conspiracy piece, quite the opposite. They are following a policy that is in the greater good, but hurts the individual saver.

Currently, long term inflation is around 3.0% (higher in the 70s lower in the 90s). Banks are now offering passbook savings accounts in the sub 1% a year. This creates a net effect of a -2% on your money. Every year you will have lost 2% of your buying power. This hurts savers. It helps the debtors. The single largest debtor on earth is the US government. They cannot easily control the inflation, but interest rates are theirs to change. They owe a lot and each year they pay it back with dollars that are worth less than the ones they borrowed.

In the long term, 30 years, you would lose 60% of the purchasing power of your savings account. (-2% x 30 years = 60%). The best protection is to purchase hard assets, like real-estate. In my scenario the same asset would be worth 60% more (in reality the numbers would be greater as a result of compounding).

When you start to consider leverage, borrowing money, to purchase the asset you receive the benefit twice. First you are paying back dollars that are less valuable than what you borrowed, due to the effect of inflation; the dollar 30 years from now has less purchasing power. Secondly, the asset is worth more than you paid for it, not as a result of anything you have done.

As long as the current fiscal policy continues, it is unwise to keep money in a savings account since it is eroding every year. While hard assets increase in value due to inflation. As a result following the government’s trend to hard assets is the best course of action for the foreseeable future