“Deflation is a fall in the general price level or a contraction of credit and available money (opposed to inflation).”
Deflation is rare in the global economies of today. This is due primarily to central banks who around the world have engaged in a campaign to create a consistent inflationary environment for their own economies. This has worked for a few decades without hyper-inflation or persistent deflation in developed economies. Except for Japan.
We have been hearing about inflation for decades, which by definition all it basically means is “expansion of the money supply.” We know the Federal Reserve Bank has had a quantitative easing policy for decades, which has led to massive amounts of money been printed by lowering interest rates to basically zero interest, resulting on high inflation and a dollar that has been getting weaker and weaker.
In terms of real estate, this policy has contributed to a housing bubble, homeowners have achieved lots of equity and high returns for their investments for rental markets, whereby the typical investor has been able to not only cover the mortgage service but if the property is well managed that investor has been able to earn good rental income.
However, we have seen that during the course of the last year or so, The Federal Reserve Bank has started tightening the money supply in order to bring inflation levels down. In order to do so, they have had to increase the interest rates 10 times in the last year. This contraction of the money supply coupled with raise in unemployment is resulting in housing deflation. Because housing prices have started to decline.
I would like to point out to a few indexes in order to show the correlation for what is causing housing deflation, before we explain how bad this can be for current homeowners and investors.
1.- First of all unemployment statistics are misleading. We believe economic hardship is much worse.
Analysts at the Ludwig Institute for Shared Economic Prosperity, a nonprofit research center focused on lower- and middle-income families, measured what they call the “true rate of unemployment” in October, it was 23.6%, more than six times higher than the official number.
Relying exclusively on a flawed metric to measure the “health” of the economy is misleading. Individuals who’ve given up looking for work aren’t even counted as unemployed, while part-time employees or freelancers who might find only one hour of work per week — financially unsustainable by any standard — are treated as employed. Millions of others are actually “underemployed,” meaning their jobs pay poverty wages or don’t make use of their abilities. And then there are the faces behind the curtain: individuals with physical disabilities or restrictions that prevent them from rejoining the labor force, and low-income families, disproportionately that are left struggling within the weakening social safety net.
In addition, we are seeing corporations filing for bankruptcy and some of the biggest retailers closing their doors, which means less jobs. We are also seeing Tech companies making massive layoffs, including Google, Microsoft and Amazon to name a few.
2.- Let’s now take a look at the Housing affordability index
The Housing Affordability Index measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income data.
Courtesy of the National Association of Realtors
A higher index number indicates that more households can afford to purchase a home. As we can see, the Composite Affordability Index has been going down since 2020, indicating that less households can afford to purchase a home.
How can deflation affect your real estate investments and cash flows?
Many real estate investors use leverage when they buy investment property. When done the right way, this can improve the yields from the investment property.
The big secret about inflation is that it causes debt to lose value over time. If you held cash for the past 100 years, your dollar would be worth 95% less than it was in 1915. This is because the value of your cash declines over time and it can buy you less each year through inflation.
Debt works in a similar manner. The value of the debt does not change (assuming you don’t pay it off) in nominal terms. However, over time, the value of that debt declines in the same way that cash does. Over the past 100 years, the value of $100 in debt would be worth less than $10 in today’s dollars. This is why using leverage during inflationary times is such a valuable secret. It causes your debt to be worth less over time.
However, While inflation secretly erodes the value of debt over time, deflation does the opposite. It causes the debt to be worth more over time. While the prices of goods and services are declining in value, the price of the debt is unchanged. Actually, it appreciates in comparison. This is why it is important to reduce or eliminate your debt if there is a negative inflation rate.
To summarize, when you have deflation, the value of your real estate drops, the cash flows drop, and if you are using leverage, those drops are amplified by the amount of leverage you are using. Remember, do not have a mortgage if we have deflation.
Good article Maria. The majority of people are not ready for the crash that is coming, especially because so called “real estate experts” are stating the market is going to rebound in 2024. This info contradicts data that other economists are bringing forth regarding declining food supply, higher food prices, car repossession on the rise and people simply not making ends meet, let alone vast layoffs you stated in the above article. I realize its all part of the Agenda 2030 plan to create chaos to make people comply with their agenda. We must not comply. Unless the people wake up to why all this engineered chaos is happening they will become desperate and comply: accept 15 minute cities, UBI (universal basic income) just because of sheer desperation. We now see it clearly engineered in Lahaina, Maui. So sad. The answer?We need to be encouraging people to come together in communities, support each other with our gifts, talents and treasures. We have been conditioned to be isolated, via TV and now cel phones, people stay in their homes and don’t even know their neighbors, all by design. Before TV, community cohesiveness was the mainstay of society. Now very few come outside. This must change if we are going to survive this deepening attempted take over from our corrupt government. Who’s on board? Let’s get organized!