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Florida Real Estate and Inflation

A constant motto in my conversations with potential customers is that inflation is a key factor in Real Estate investment. My personal feelings have always been that inflation indexes and calculation have historically been somehow skewed and distorted and that they don’t accurately reflect the reality of our currency devaluation throughout the last two decades.

A quick trip to supermarkets and gas stations and a quick look at your property taxes, property insurance bills, the price a new home, will quickly put in doubt the touted 2% or 2,5% annual inflation rates included in official economic data. All signs are that we are heading into a period of high inflation, fed by enormous hikes in oil and food prices.

Real estate is a unique, valuable and tangible asset, which is not always the case with stock market shares, bonds, and other paper investments. World’s population is constantly growing; the amount of available land and recourses is not. Unlike a dollar in the bank, its actual value will not shrink with inflation. Real estate will always be needed for residence, commercial, farming and industrial use.

My opinion has always been that, if we follow certain criteria and reasonable principles when acquiring real estate, it will always be, on the long term, the best investment we’ve ever made. In Florida, this is especially true, since we are one of the fastest growing states in the US, and we are due for a continued migration from of baby boomers from Northern states, Latin Americans, and Europeans. The very high inventory of condos and homes available will be eventually absorbed – and faster than most of us realize. After all, a couple of years of low construction would be enough.

The newspapers, on July 17th, 2008 were talking of a last month inflation percentage in the vicinity of 1% or more. Is that scary? Even though they clarify that it’s due to fuel and foods only, while in other items such as clothing, it was actually negative, I am afraid that, in the longer term, food and fuel will reflect on all other components. Not only transportation, heating, energy are affected by fuel prices.

Practically every other item will surely feel the pressure and eventually ride the inflation wave.

It’s a fact that once inflation takes off, it is self-feeding and hard to contain. Not that I want to be a fear monger, but I have seen this happen in the past and I have seen banks paying 18% interests on Certificates of deposit!

It is true that inflation can be a blessing for many mortgage borrowers, when their interests are at a fixed rate. Imagine paying during 30 years a mortgage at 6%, when inflation could be in the range of 10 or 15% and new buyers could be paying an 18% fixed rate! Impossible? Not really, it has already happened not so long ago.

That’s what, sooner than most believe, real estate is due for a strong recovery. And you better not be too late!

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