2021 Real Estate Investing Is Like Playing With Fire
According to George Gammon, if you're wanting to play with real estate right now – to a certain degree – you're playing with fire.
He's not saying don't do it. He just wants you to understand the risks. His main point and Jason Hartman would agree, is that you have to look at the property as the liability.
The asset is the 30-year fixed-rate mortgage. Not the Property
The asset is the 30-year fixed-rate mortgage because the probability is much higher moving forward that you're going to eventually lose purchasing power with the property you purchase.
Think back to the old days when times were normal, say the 1980s or the 1990s. You would have lost money on the loan because you had to pay it back with interest.
So you had to pay back more dollars than you actually borrowed in those days. You expected to lose purchasing power on the loan. That was the risk.
Everyone knew that. So why would anyone buy a house knowing that their house was going to cost them more in the long run?
It's because the investor believed that the appreciation and the cash flow from the asset itself would more than make up for the loss in purchasing power. Principle, plus interest.
And if it's a rental property obviously your tenants are paying the mortgage payment, and then some.
Real Estate Investing In 2021
In 2021, it's the reverse. If we are just looking at equity, then George believes the probability is high that you will lose purchasing power on your investment. It's just like you would lose purchasing power on the loan in the old days. The formula is still A+B=C. It's just they've reversed rolls now.
Short the US Dollar with a 30-year fixed-rate mortgage
Before, it was A+B=C. Now it's B+A=C. You've got to be aware of that important shift because the risks have changed.
George believes that you're going to increase your purchasing power on the debt side by owning that 30-year fixed-rate mortgage over time.
He's not claiming the dollar will tank. Heck, it could appreciate. Who really knows? We could see deflation. He also doesn't think we'd see deflation for a long period of time.
He thinks we would definitely see a drop in asset prices. And maybe more disinflation in consumer prices. But who really knows what we'll see?
Your house will lose purchasing power. Your dollar short position will do well.
George thinks over a 30-year time if you've got a rental property that's positive cash flow – in essence – you're being paid to short the dollar.
The increase of purchasing power on the dollar short position will be greater than the decrease in purchasing power on the property you invest in.
Probabilities are high that Housing prices will return back to their historic lows
Adjusted for inflation the price of housing will likely fall at some point, eventually hitting historic trend line lows, like in 2012.
And to be clear, prices do not have to back down to their historic trend lines in nominal terms. They can fall back to their historic trends in real terms, adjusted for inflation.
Housing prices could move up for the next 20 years in nominal terms. But we could still fall to the adjusted prices that we saw in 2012.
By the way, we are at the historic trend line going back to the year 1900. Over 100 years of data. Over a hundred years of housing prices, that DID NOT go up adjusted for inflation.
So if housing prices didn't go up – adjusted for inflation from the year 1900 to the year 2000 and again in 2012 – then why should we assume that for some magical mystical reason that housing prices won't go back down to their historic trend line?
No, the probability is extremely high that housing prices will fall to the same levels they were in back in 1900, the same point they were in back in 2000, and the same point they were in back in 2012. Why?
Housing Prices Reflect Incomes
Because housing prices are just a reflection of incomes. And incomes – to a certain degree – are an extension of inflation. You've really got to understand that.
Like George said. He's not saying don't invest in real estate right now. He's saying make sure you're doing it with your eyes open.
Like this content? Get more premium knowledge and information about the markets, real estate and investing from George Gammon, Lyn Alden, Chris MacIntosh, Brent Johson, Jason Hartman, Tony Greer, and Patrick Ceresna. Beat the elites at their own game by joining Rebel Capitalist Pro today.
Your first week comes with a $1 trial, so you can self-cancel before your membership[ really starts without any billing hassles.