Beyond the basics: asset price inflation in the real estate market
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This article distinguishes asset price inflation in the real estate market from consumer price inflation and analyzes the prevailing myths regarding real estate prices. For the basics on consumer price inflation, see Part I of this article series, Back to basics: inflation 101.
Asset inflation: where does real estate come in?
In contrast to consumer inflation, asset inflation must be considered in terms of various economic factors affecting asset markets, such as stocks, bonds and real estate. The primary asset that concerns us in this writing is of course real estate.
Real estate is not a commodity (i.e. a good or a service) but rather an asset. The simple distinction here can be thought of in terms of consumption: a commodity is, generally speaking, a consumable good.
Once a commodity is purchased, such as oil, it is consumed and must be replaced by further production of the commodity if it is to continue to hold its value in the economy. An asset, while either intangible or tangible (tangible in the case of real estate) is considered property held by an owner who may expect future economic opportunities during his ownership, i.e. by using it himself, leasing it to others, selling or trading it — not consuming and thus depleting it, thereby requiring it to be replaced as is the case with commodities.
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About The Author
Jeffery Marino
is an assistant editor and lead on our first tuesday news alerts, specializing in critical economic analysis and its impact on California’s real estate market.
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I’m a believer in the “follow the money” technique to explain destructive economic and social effects.
Wall Street and various financial institutions who over the last half dozen years CAUSED the apparent “loss” of trillions of dollars worth of little peoples’ assets in stocks and related investments, have ended up GAINING even more UNEARNED wealth by being PAID by the same people (taxpayers) who they had fleeced because our trusty GOVERNMENT said that they were “too big to fail”. Of course, they’re even bigger now. But unfortunately, there isn’t too much little people’s wealth left up for grabs in the financial markets anymore.
Now as a result of the economic chaos and financial institutions CRIMINAL lending practices, these lucky lenders have COINCIDENTALLY ended up owning a very large part of the little peoples’ LAST remaining valuable asset, HOMES. Primarily because our trusty GOVERNMENT accidentally failed to properly regulate them.
And COINCIDENTALLY, as First Tuesday recently reported, our trusty GOVERNMENT has altered regulations so that these lucky lenders do NOT have to liquidate these properties for 5-10 YEARS. Thereby allowing them to become massively profitable LANDLORDS until prices have risen such that the REOs can be very profitably sold. Of course, by that time, at the rate things are going, it may be STANDARD for little people to ONLY rent, not “own” SFHs.
Needless to say, once the rental market is as thoroughly controlled by “regulated” big players as is communications (phones, internet etc.) and utilities (energy, water etc.), these lucky landlords can be expected to squeeze as much remaining wealth out of their not-so-lucky tenants as our trusty GOVERNMENT allows.
So, if you were a lucky lender, with virtually unlimited cost-free funds provided by the trusty GOVERNMENT and your trapped depositors, would you rather make it EASY for little people to take this valuable inventory off your hands, or would you be HAPPY and THANKFUL that the trusty GOVERNMENT has coincidentally saddled you with so many inane and ridiculous requirements that the little people market is so small as to be negligible?
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Terrific article with lots of things to ponder. I had to read it a couple of times and take notes along the way to understand. But after all that reading it was the last statement that really confused me: “That means right now California real estate, regardless of type, is a hedge against consumer inflation and nothing more, period.” Having described real estate as an “asset” it seems it might have benefits in addition to just being a hedge against consumer inflation. How about a rental asset. If one pays cash for real estate and rents it out it becomes an income producing asset (assuming the rent exceeds the property tax and water bill). Then we have a hedge against inflation that delivers a monthly dividend. Of course, if we head into a deflationary period the value of the asset could go down along with the rental payment. In that case, wait until the asset goes up again before selling. But fluctuations occur with most assets. And real estate is going to be an asset a lot longer than many stocks, bonds, and bank accounts. The only thing I can think of that distinguishes this asset catagory from other asset catagories would be the ability of the government to confiscate it through eminent domain proceedings. Hmmmm.
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