will inflation eat away at my downpayment?
hi all. lurker coming out of the shadows here...have a question for you.
my wife and i are renting in lynnwood at the moment for dirt cheap (renting from my in-laws), and we've got more than enough cash saved away for a 20% downpayment on houses in the price range we're looking at. i've been planning on waiting the decline out a little bit before buying (I was thinking spring of next year), but all this recent talk of inflation has me worried. if they cut rates again, and then maybe again, is inflation going to eat away at my liquid cash downpayment? what do you all think the balance will be in the long run between waiting it out and buying sooner?
(the money is getting a decent interest rate, 5.05%, in one of these internet banks)
my wife and i are renting in lynnwood at the moment for dirt cheap (renting from my in-laws), and we've got more than enough cash saved away for a 20% downpayment on houses in the price range we're looking at. i've been planning on waiting the decline out a little bit before buying (I was thinking spring of next year), but all this recent talk of inflation has me worried. if they cut rates again, and then maybe again, is inflation going to eat away at my liquid cash downpayment? what do you all think the balance will be in the long run between waiting it out and buying sooner?
(the money is getting a decent interest rate, 5.05%, in one of these internet banks)
Comments
If you are concerned with inflation eating away your down payment, have you considered investing in TIPS (Treasury Inflation Protected Securities)? You are guaranteed to earn a rate of return above inflation on securities that are backed by the US Treasury. You can gain access to these through many types of mutual funds and if you have a personal brokerage account you may want to give them a call and they can help you out.
However, if you're currently earning 5% you should handily beat inflation which is currently running at 2-3%.
Did you buy any gold in 1998/1999 when it was down to $260 - $270?
How many loafs of bread did you 'give up' for one oz? Bread was about $1.00 /loaf then and is close to $2.00 today. But gold is now $735. So, the 260 loafs of bread you gave up then will now get you 367 loafs today.
If you had put that $260 in your mattress, your 260 loafs would have shrunk to less than 130 today. Inflation sux.
In any case, it sounds like you are convinced (and I tend to agree) that a particular asset (housing) will decline/deflate in value. This provides a strong incentive to save, because your return is increased by waiting (5% return + INCREASED housing purchasing power in future). Even if prices stayed flat, your return of 5% is well above high estimates for present inflation levels.
Save away and stop worrying about being 'penalized' for doing so.
Don't forget those pesky taxes. Interest is income and is taxed as such. So that lovely 5% is actually somewhere in the 3-4% range after taxes, assuming you're a "little person" and actually pay taxes.
If the numbers quoted on the news are true (~ 2%), then it's easy enough to find a savings vehicle that matches or beats inflation. If real inflation is more like what some bloggers say (10%+/-), then your paycheck and savings are getting eaten up either way. If you have a mortgage, inflation leaves you with less and less for the payment, unless you are getting raises yearly that exceed real inflation. If not, you have much more leeway, but the savings you have are worth less all the time.
More than inflation, rampant house price appreciation damages down-payment savings strategies. At least that is what happened for me. By the time I came up with 20%, prices are so out of whack that I couldn't take the risk on the PITI on a house I'd live in here.
Couldn't disagree more. Official inflation is way understated because this is an advantage for the state: lower cola adjustments for entitlements. Thus your Tips + guaranteed return could easily be lower than the actual rate of savings devaluation.
There are sites that try to track the Fed's discontinued M3 series and the CPI index as it was calculated before the "adjustments" made during the Clinton years, and by that measure, TIPS are a loser. If you are waiting for a 5% home price decline and already experiencing a 3% decline on your savings PLUS having to pay taxes on the "earnings" you make to try to keep up with it....
Consider the possibility that the inflation fear mongering you perceive only looks that way because you don't understand it.
[url]http://www.nytimes.com/2007/09/23/business/23every.html?_r=1&oref=slogin
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(I love when people offer me a link where I can give out my personal info to a large corporation - thanks so much. It is an even bigger bonus now that Murdoch owns them!)
But, don't bother. Ben's full of shit. He doesn't know what he's talking about. We KNOW what causes inflation. Watch that linked video and then read Ben's article again. If you understand the video, you'll do what I did halfway through reading Ben: stop.