Is Now The Time to Buy a New Home?

14 Dec

houses for sale sign

houses for sale sign (Photo credit: Images_of_Money)

Bloomberg recently reported (“Treasury Scarcity to Grow as Fed Buys 90% of New Bonds”) that, “The average interest rate on 30-year mortgages is a record low 3.31 percent.”

Record-low interest rates on mortgages certainly provide an incentive to buy new homes.  But we not only enjoy record-low interest rates, the prices of the homes have fallen by 30% or more since A.D. 2008.  Thus, today’s homebuyers enjoy both low home prices and low interest rates.  Compared to A.D. 2008, today’s home mortgages are a steal.  Hard to resist that sort of temptation.

But then, that’s the point, isn’t it?  Today’s record-low interest rates are intended to tempt us to borrow currency from the banks.

Why the temptation?  Because the economy is slow and tending to recession or worse.  Therefore, much of the public is anxious about retaining their jobs and their ability to repay whatever they borrow.  Lacking confidence in the economy and their capacity to repay loans, many people are reluctant to borrow.  Therefore, the interest rates are at record lows to tempt people to risk going into long-term debt to purchase a new home.

•  But buying homes as an investment is not so simple that a decision can be made based merely on home prices and mortgage interest rates.  There’s also the question of inflation.

As measured against the price of gasoline, the purchasing power of the fiat dollar has fallen by 90% since A.D. 1970.  In the same period, as measured against gold, the fiat dollar has lost about 98% of its purchasing power.  Measured against the average prices of homes ($26,000 in A.D. 1970 and $300,000 today), the fiat dollar has lost about 91% of its purchasing power.  These losses aren’t entirely due to government’s determination to inflate the dollar.  Crude oil supply problems and increasing home sizes have contributed to rising prices.  Nevertheless, monetary inflation (printing more paper currency to add to the money supply) has been the predominant cause for this loss of purchasing power.

Government is determined to continue causing monetary inflation in order to reduce the purchasing power and real value of the National Debt.  If government succeeds in causing as much monetary inflation over the next 40 years as it has over the past 40 years, you’d have to be nuts to not buy a home on credit today.  Low home prices, record-low interest rates and significant inflation offer a combination of incentives that’s truly beguiling.

If inflation persists, by the time your 30-year mortgage expires, you may be paying your monthly mortgage payments with dollars worth only 25 cents as compared to the dollar’s current purchasing power.  You might start paying $1,200 a month on your mortgage and end paying the equivalent of $300 dollars a month.  Plus, if inflation continues, the price of your home will increase—guaranteeing a nominal profit on your home investment.

Thus, if government can cause as much monetary inflation over the next 40 years as it did in the previous 40, buying a new home today is a brilliant investment decision.

But there’s the problem, isn’t it?  Can government sustain monetary inflation over the next 20, 30 or 40 years?


•  There are two kinds of “inflation”:  monetary and price.

Price inflation is “real” in that it’s caused by changes in supply and demand in the free market.  If the supply of homes increases more rapidly than demand, the price of homes falls.  As free-market prices of homes fall, home builders make less profit and slow home construction until prices stabilize at a level that is both profitable for the builder and affordable for the buyer.

If the people’s demand for homes outstrips supply, the price of homes rises and homebuilders (able to make more profits) start building more homes until prices once again stabilize at a level that’s both profitable for the builder and affordable for the buyer.

Price inflation (and price deflation) occur in the truly “free” (unmanipulated) market.  In the “free market,” the supply can change and the demand can change, but the value of the money used to measure prices is fundamentally fixed and unchanging.  Thus, the “free market” is characterized by a gold- or silver-based money. Prices are measured in ounces of precious metal.  Because the money is metallic, it can’t be artificially increased by “spinning” it out of thin air.

In the free market, supply and demand reflect only the will of the people.  If the people demand more of some product, they’ll pay more and the supply will be increased.  If they want less of that product, they won’t buy unless the price falls, the product becomes less profitable and the supply is diminished.  By controlling the supply and demand, the people control the prices of products and services.

In a true free market dominated by price inflation and a metallic currency, whenever demand exceeds supply, the supply is increased until a level of price stability was achieved.  Whenever supply exceeds demand, production and the price of the product will fall until a level of price stability was achieved.

This price stability may be only temporary.  Nevertheless, a—perhaps the—fundamental objective of the free market is to stabilize prices at a level that’s both profitable for the builder or manufacturer and affordable for the buyer.

Monetary inflation, on the other hand, is “artificial” and illusory in that it is not a consequence of natural changes in supply and demand, but is instead intended to be a cause for changes in the supply and demand in the un-free/manipulated market.

Monetary inflation is not controlled by the people’s demand for a product nor by their work ethic and consequent capacity to produce an increased supply that product.  Under monetary inflation, people become increasingly lazy and dependent on government.  I.e., because monetary inflation depends on fiat currency, and fiat currency can be “spun out of thin air,” those who are closely connected to the government will receive generous allowances of freshly-spun currency.  Inevitably, these people become dependent on “free” government currency and become otherwise as useless as crack addicts.

Monetary inflation is controlled by the government and is absolutely dependent upon a fiat currency that has virtually no tangible, intrinsic value.  Without intrinsic value, fiat currency can be “spun” out of thin air and granted to anyone who offers serious support for the government.  To acquire fiat currency, you need not be productive—only supportive of government.

Significant, persistent market manipulation can’t exist without a fiat currency.  Significant, persistent market manipulation can’t exist in an economy based on a gold- or silver-based monetary system.


•  To illustrate monetary inflation, suppose a government replaces the nation’s gold- and silver-based money with a fiat (paper or digital) currency.  That government is now free to print however much paper currency it deems is necessary to keep the economy functioning properly.  That government is also free to print enough “extra” fiat currency to guarantee a sufficient rate of inflation to ensure that borrowers will be able to repay their loans with “cheaper” (inflated) dollars.

Faced with the promise of persistently rising prices (caused by persistent monetary inflation), people are continuously motivated to buy new homes and other products.  We become “consumers” rather than producers.  A classic illustration of this change is seen in the “sub-prime borrowers” of the 1990s and early 2000s.  Government and banks really believed that they had “wired” the system so as to allow even the non-productive to not only purchase (consume) homes but even profit from that purchase.  It was a national madness that was central to causing our current economic decline.

The madness was justified by the belief that as more consumers purchase new homes, economic activity increases.  Home builders and laborers make more currency.  They spend more currency.  The economy is “stimulated” and everyone seemingly prospers.  Ultimately, thanks to the government’s scientific application of just the right amount of monetary inflation, the economy can remain in a perpetual state of “stimulation” and we can all get rich without really having to work (produce something tangible).  All we have to do is harvest (borrow) fiat dollars off the Federal Reserve’s “fiat money tree”.

This was the economic theme of the 1990s.  We didn’t need to actually produce things anymore.  Therefore, we could ship our industries to China and still get rich by means of merely controlling “financial services”.  So long as we consumed based on nothing more than increased debt, we could all get rich.  In retrospect, how could people be so damn stupid?


•  Note that the people were motivated/manipulated into buying new homes by the promise of persistent inflation and persistently rising prices.  Who would take out a 30-year mortgage to buy a new home if they thought the home’s price would stabilize or even decline within the next five years?  It’s the promise of persistently “cheaper” dollars and of a persistent increase in the home’s nominal price that stimulates us to take out a 30-year mortgage.

Who implicitly promises “endless” inflation?  The government.

Thus, unlike the people’s “free market” (whose primary goal is to cause price stability), the government’s un-free, manipulated market’s primary objective is to avoid price stability and cause persistent price increases.

So long as the dollar inflates and prices increase, ignorant people are induced to borrow and spend to secure the illusory/nominal profits provided by investing in homes.  I.e., if people believe that the house that costs $300,000 today will sell for $500,000 in ten years, they’ll buy in hopes of reaping a $200,000 profit.  They don’t understand that the $200,000 “profit” will be only nominal because it’s based primarily on monetary inflation.  If inflation causes $500,000 in ten years to have no more purchasing power than $300,000 today, there is no real $200,000 profit—only an illusion of increased income and a reality of higher taxes.

In pursuit of inflation’s illusory “profit”, the people are induced to work much like a cartoon donkey that persistently follows the carrot suspended from the stick tied to the donkey’s head and dangling six inches from the donkey’s nose.  Similarly, by means of inflation, the people’s economic activities can be controlled by the government.  Thus, fiat currency helps subject people to government control and even despotism. (Conversely, a gold- or silver-based monetary system is conducive to the people’s freedom and productivity but contrary to government’s determination to control.)

If government causes just enough monetary inflation to cause “cheaper” dollars, the people will be predisposed to borrow to buy a new house.  If government prints enough fiat currency to guarantee significant monetary inflation, people won’t merely buy one new home to live in—they’ll buy several new homes as investments. (How many people were buying two or even three homes in the early 2000s?)  Bankers will be encouraged by persistent inflation to lend to “sub-prime” borrowers who they know are likely to default on their mortgages.  Why?  Because even if the borrower defaults, the home’s price will have appreciated sufficiently to insure that the bank still makes a nominal profit—even on a non-performing mortgage!

Persistent inflation!  It’s genius!

And it can’t miss!

Just ask Alan Greenspan.


•  In fact, the “genius” of fiat currency and persistent inflation can miss.  Why?  Because the price inflation of the free market and the monetary inflation of the manipulated market are fundamentally antagonistic.  Sometimes, the people’s price inflation (based on supply and demand) overwhelms the government’s monetary inflation (based on government control).

We saw it happen in A.D. 2006-2008 when the people who populate the free market began to realize that, thanks to government inflation and market manipulation, and thanks to the public’s willingness to blindly chase the carrot of illusory profits, the public had built and purchased too many homes and condominiums. There was such an over-supply of homes that the free market demand plummeted, prices fell, sub-prime loans became losers rather than guaranteed winners, and foreclosures skyrocketed.  Some mortgagees—seeing the mathematics on the wall and realizing their homes were worth less on the market than they were on their loans—simply abandoned their homes.

In essence, the government’s unspoken promise of persistent inflation (and ever-rising home prices and guaranteed, though nominal, profits) failed.   The people (much like the donkey chasing the carrot) sensed the deception and stopped pursuing the promise of unearned wealth.  The US and even global economies nearly crashed.  The government and Federal Reserve reacted by injecting close to $2 trillion fiat dollars into the economy in an attempt to restore monetary inflation and get the “donkeys” to once more pull government’s wagon in pursuit of unearned profits.

Funny thing, though:  the “donkeys” have, so far, refused to be tempted by the bigger, fatter, inflated “carrots” dangling just six inches beyond their noses.   The government’s monetary inflation has prevented an overt crash, but it has also failed to stimulate the donkeys to once again pull gov-co’s wagons.

This failure must be unnerving for government.  They’ve done almost everything they can to stimulate the donkey/economy into action, and nothing has worked well.

Without the control provided by monetary inflation, government faces three prospects:  1) abandon the pretense of economic control and restore a free market controlled by the people, complete with a gold- or silver-based currency; 2) maintain governmental control with overt force (martial law); or 3) do nothing and risk letting the nation (uncontrolled by the free market or by government) to disintegrate into chaos.


•  Power concedes nothing.  Therefore, we can depend on government to refuse to do the right thing and restore control to the people and their free market.  For now, they will “kick the can down the road” and play for time by trying to reassert the power of monetary inflation at the same time the economy is slowing and the free market is causing negative price inflation (deflation).

Without a genuine increase in demand and supply (labor), employees are being laid off, unemployment is rising, the economy tends to stagnate or decline—and a profound conflict ensues.  Positive monetary inflation and negative price inflation (deflation) have become openly antagonistic.

While monetary inflation remains “positive” and continues to try to increase prices (so as to increase both consumer demand and the nominal profits needed to stimulate a greater producer supply), the real economy wanes and price inflation turns “negative” to become deflation—a tendency for prices to fall.

I.e., if the consumer-donkey won’t buy a widget for $100, maybe they’ll buy one for $50.  If the producer donkeys can’t even make a nominal profit selling widgets for $50 they’ll have to cut costs (reduce the hourly wage they pay labor), or import their widgets from China (reduce domestic employment) contributing to more unemployment, a diminished capacity for the consumer-donkeys to purchase more widgets.

With unemployment rising, the economy slides towards depression and the free market’s price mechanism pulls prices down (deflation) at the same time the government’s manipulated-market (monetary inflation) is pushing prices up.  When the irresistible force of monetary inflation meets the immovable object of free market price deflation, somethin’s gotta give.

You might suppose that government could simply abandon monetary inflation and let the free market find new supply, demand and price levels.  But because government has not only relied on monetary inflation for several generations, but also gone deeply into debt, that government can’t allow the free market to reset supply, and demand since the resulting price levels would inevitably be lower.  Falling prices (deflation) mean the true size of the National Debt (as measured in purchasing power) must rise.

Modern government depends on increasing the nominal size of the National Debt at the same time government reduces the purchasing power of the fiat dollar by means of monetary inflation.  I.e., if the National Debt rises nominally from $12 trillion to $16 trillion at the same time that the purchasing power of fiat dollars falls (thanks to monetary inflation) from 100 cents to, say, 75 cents, the true size (purchasing power) of the National Debt hasn’t increased at all.  If, on the other hand, the free market’s negative price inflation (deflation) prevails and the purchasing power of the fiat dollar increases from 100 cents to 125 cents, the true size (purchasing power) of the National Debt might grow from $16 trillion to $20 trillion.

If the government is already technically bankrupt (“Can we just be honest about this?  We’re broke.” Speaker of the House John Boehner), it can’t afford—and might not even survive—an increase in the purchasing power of the National Debt.  In other words, the free market’s current price deflation threatens the power and even survival of the national government.   We can therefore expect a government fighting for its own survival to increase taxes, impose price controls, impose production controls, and even impose martial law to suppress the free market’s price deflation and thereby somehow survive the adverse consequences of its addiction to fiat currency, monetary inflation, and deficit financing (National Debt).

We saw that formula imposed in the former Soviet Union.  But, inevitably, the truth will out.   The free market’s negative price inflation (deflation) will overwhelm the government’s monetary inflation, and that government will disintegrate.  The result could be social, economic and/or political chaos.


•  So, if you’re considering whether to buy or not to buy a new home just now, the big question is whether future prices will be determined by government’s monetary inflation or  by the free market’s price inflation (or deflation) over the term of your mortgage.

If government can cause enough persistent monetary inflation in the manipulated market to cause the fiat dollar to depreciate, prices to rise, and reduce the real value of the national debt for the next 20 to 30 years (and government certainly wants to), now is a great time to buy a new house.  The combination of low home prices, record low interest rates, and persistent inflation make buying a home a brilliant decision.

On the other hand, if the “donkeys” in the free market refuse to bite at the government’s inflated carrots and the economy slides deeper into recession or depression, unemployment will rise, your capacity to repay your loans will become doubtful, prices will fall (meaning no guaranteed, nominal profit in your home “investment and you’ll repay your mortgage with “more expensive” dollars), and you’d have to be nuts to take a mortgage to purchase a house at this time.

So which is it?  Will the irresistible force of government’s monetary inflation prevail?  Or will the immovable object of economic depression and free-market, supply-and-demand price deflation prevail?

Tough call.

But, eventually, the free market (price inflation/deflation) must prevail because it’s based on truth.  The government’s manipulated market (monetary inflation) must fail because it’s based on lies and is therefore irrational.  I see no way for government’s monetary inflation to persist for another 20 to 30 years.  In fact, I don’t see how government’s monetary inflation can even last for another five years—even three years is doubtful.

In the end, not even the Soviet Union’s police state could permanently control and overcome the forces of the free market.  Any presumption that the US government will do better than the Soviets is irrational.

I believe the forces favoring further economic decline and price deflation will prevail over the next three to ten years.  If government can’t guarantee that monetary inflation will persist for the life of your mortgage, then right now may not be a bad time to buy a house if you can pay cash, but it’s a terrible time to take out a mortgage.


Posted by on December 14, 2012 in Inflation/Deflation, Money


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10 responses to “Is Now The Time to Buy a New Home?

  1. ror1774

    December 14, 2012 at 3:54 PM

    I agree this is a terrible time to take out a mortgage. I refer you to this and the related posts that support the statement.

  2. palani

    December 14, 2012 at 5:24 PM

    Government needs to have you believing you can purchase things with those FRNs, things like land, cars, houses. In a word anything that can be attached if you decide one day to take on government and believe you can do it without risk of losing everything they have provided you as a benefit. Your “purchases” are used ultimately to control your behavior.

    The 14th amendment creates a social system (a state) that is intent upon invoking the 10 planks. There is no private property at all in the plane that this amendment creates. In the plane of common law things are not bought and sold with debt instruments while in the 14th amendment plane ONLY debt instruments can purchase anything. But in the 14th amendment plane you have the perception of owning something only as long as you don’t create a problem. If you do create a problem your perceived ownership is what is going to be used to get you back to the straight and narrow path of the 10 planks.

    I wouldn’t argue with people in this unusual plane. They are convinced that you may have your cake and eat it as well. I agree with everyone occupying it that the 14th amendment communist plane has no private property. Fortunately I don’t own anything in this plane. I carry a $5 1878 gold piece as my line in the sand as my own private property and let corporations (legal fictions) hold the paper that shows they own the world in which they exist.

  3. ta

    December 15, 2012 at 2:23 AM

    But at the rate theyre printing, monetary inflation will takeoff, once those printed dollars actually hit the economy. Im guessing stagflation.

    Excellent breakdown though. Building up to the following point made it all crystalize perfectly to me:

    “With unemployment rising, the economy slides towards depression and the free market’s price mechanism pulls prices down (deflation) at the same time the government’s manipulated-market (monetary inflation) is pushing prices up. When the irresistible force of monetary inflation meets the immovable object of free market price deflation, somethin’s gotta give.”

    I think what will give is inflation with no jobs leafing to another doubling of the foodstamps/welfare and eventually riots.

  4. deb

    December 15, 2012 at 1:43 PM

    And suppose you are able to buy a house with FRNs, what’s to stop the commie pinkos from stealing it from you if you don’t pay them to protect you from them stealing it from you, and perhaps send you to Siberia either way.

    I saw it happen in Europe to my family–in the name of patriotism and for the good of the whole. Did I forget to mention redistribution of forceful contribution of owned land? My family was not sent to Siberia but friends of the family were sent just a few decades in a dungeon, primarily since they were Christians living on the land God gave them to possess as an inheritance.

    I believe at this moment it would be good to stop dreaming the impossible American FRNs dream and start possessing our inheritance–en masse.

  5. GreatScott

    December 15, 2012 at 1:45 PM

    The only point I disagree with is you are assuming the price that gold and silver is trded is not manipulated. We all know (or should know) JP Morgan has been caught many times manipulating the price of silver and the Treasury department can devalue the price of gold or silver any time they want to, so the idea that a monetary system should be based on something that can be manipulated is a bad idea. However, it would be better than nothing to tie the value of an FRN to gold than just what Ben Bernake says it’s worth.

  6. rl

    December 15, 2012 at 6:23 PM

    One thing not in your equation is Property Taxes. You have to figure the cost of property tax in your equation. I payed 7400.00 a year in proper taxes in Texas. Now over the life of your loan, say 30 years that is a minimum 225,000.00 in additional costs. Granted some of those taxes are deducted from your income tax but some of those taxes have to deducted from the value of the house. So I bought a house for 367,000. Over ten years I pay 74,000.00. Now the total payed over ten years would be 367,000 plus say 50000.00 for property tax and then interest payed to the bank dependent on how much borrowed and what term. So at least 427,000.00 needed to break even when the house is sold. Now add 6 percent for real estate fee. What will that house sell for in this market after 10 years. $387,000.00! Subtract 6 percent, plus property taxes plus intrest and you won’t come out ahead.

  7. Jake

    December 16, 2012 at 11:46 AM

    Correct me if I’m wrong here, but wouldn’t leveraging the banks fiat money on a loan be good in terms of paying it back off when inflation hit its peak? If I got a $300K mortgage today, made the minimum payment until dollars became extremely cheap (hyperinflation), couldn’t I then cash in some gold or silver (at its peak rate against an inflated dollar) and pay the home off for virtually pennies on the dollar compared to the dollar’s relative value when the loan was originally procured?

    • Adask

      December 16, 2012 at 1:32 PM

      Absolutely. IF there is hyperinflation. The point to the article is that the free market is pushing for deflation while the government is pushing for inflation and the question is which force will prevail. Maybe we’ll see hyperinflation. Maybe we’ll see deflation. In either case, if you don’t really NEED a new home right now, the most sensible choice may be to SAVE as much of your wealth as possible. We may be coming to a time where we each need savings more than homes, cars, etc. If those savings are maintained in gold or silver coin, their purchasing power should at least be preserved and may probably grow significantly–especially if we seen hyperinflation. It’s not impossible that in a future era of hyperinflation, a handful of gold coins worth $20,000 today might be sufficient to buy a new home. This is a big question. During an era of hyperinflation, will the purchasing power of gold of gold rise more rapidly than the hyperinflated prices for homes, cars, etc. If the answer is Yes, then it’s very smart to save by means of gold/silver and simply wait patiently for the days of hyperinflation and make a great deal at that time. . . .

      If you take out a mortgage right now in hopes of repaying the whole thing with hyperinflated dollars in the next few years, that will work IF there is hyperinflation and IF you are able to SAVE enough hyperinflated dollars during the time of hyperinflation to pay off the debt. The problem with hyperinflation is that the fiat dollars will be losing value so rapidly that no one will want to save them. In Zimbabwe, their recent hyperinflation meant that a dollar acquired in the morning might be worth only 50 cents by evening, 25 cents the following morning and maybe a dime the day after. The only way to get any purchasing power out of their hyperinflating Zimbabwe dollars was to spend them instantly. That means no one can be saving during hyperinflation in the medium of fiat currency. So, if the price of bread is $20 a loaf (and going to $30 next week), how are you going to save enough fiat dollars to pay off your mortgage?

      More, hyperinflation typically run like a skyrocket. It goes up very fast and then falls pretty fast, too. If you don’t catch the hyperinflation’s peak and pay off your mortgage at that “moment,” your strategy may not work as well as you hope.

      My main observation in the previous article is that you can no longer absolutely depend on government to cause enough inflation to cause enough inflation over the next 20 to 30 years to guarantee that you will pay off your long-term debts with “cheaper” dollars. If the fiat dollar fails or if government loses or abandons its ability to inflate the currency, long-term debt may become hazardous to your health since you may wind up repaying your mortgage with “more expensive” dollars.

      If you need a new house now and you can pay cash, I think that’s a probably a good idea. In the event of hyperinflation, the price of your home will rise, but you’ll still be living rent-free/mortgage-free. Even so, I doubt that purchasing a house right now (which is probably good) will serve you as well as purchasing gold and silver for savings, but I could be wrong. I believe the big buying opportunities are coming in the next 12 to 36 months. But those opportunities (low prices) will only be available for those how have real savings. But, again, who can say? I could be wrong.

      • Jake

        December 17, 2012 at 1:40 PM

        Great points in response. This definitely sheds a new light on a previous held line of thinking in my mind. More to your last point, I just read the book “Aftershock” again. According to the author, even now we still have a ways to go before the real estate market bottoms out.

  8. MVG-AVG

    December 16, 2012 at 4:58 PM

    Jim Willie says the bear market in housing will not end .Not until the factories return to the United States.I only saythe United States because all of the corporations operate in “this state”.This is not gonna happen,Mr.Willie has been spot on in his predictions for the last several years .He does recommend the purchase of productive agricultural property .


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