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What to do in a inflation enviroment?



We are living in a world where inflation is hitting everywhere. We do not know what will happen in the next few years.


June's 2022 inflation report suggests that we had 9.1% increase in inflation compared to the last year. Assuming general inflation is around 2-3% in the United States, this is absolutely important to know where we are heading.


Since inflation is a problem for the Fed, they will raise the rate until the inflation comes down to normal. There is the possibility of increasing an additional 1% to the next Fed meeting, or most likely 0.75% for the rate hike for the upcoming Fed meeting.


Interest is important because it dictates how the money flows work. For instance, if the interest rate were to go up, cost of the borrowing will be more expensive and with that people will not borrow more money. It means fewer businesses will open, and fewer people will likely buy a home due to the high borrowing cost.


In return, people will less spend money and the cycle becomes a recession will come along. But what it is worth, the economy is not like the simple math that we are discussing here. There are too many unknown variables that can change this uncertain economy to the booming stock market or the rise of real estate as well. The economist will predict the world based on the perfect human behavior. But the world is not perfect and the people are not rational at all.


That is why bitcoin going to the moon and collapsing again. For that matter, Gamestop stock went to the moon as well. If we do not know what will happen then what will be the good course of action?


Any action that we take is based on the assumption that we see on a market.

For myself, I think the rate will continue to go up for the next few years. But I do not believe the real estate market will collapse due to the rise in the interest rate. It is because last 10 years the rate was going lower and lower. It means, that most rational people have already taken a position of a fixed interest rate rather than an adjustable interest rate. It means most Americans might not be able to buy a new property, but because of the rising rate, their payment will not go higher. Their income most likely will go higher due to an increase a salary (inflation will play a big role). Because of that issue, the rent will continue to rise and commercial real estate should be sound stable.


As for the existing borrowers, if the rate is 3% for the mortgage and the inflation is going for 9%, it means they just got a 6% return on the investment return because of the dollar now is worth less than last year. The borrower will win in this situation. Whereas if someone has no assets, will suffer during this inflationary period.


Then my play will be if you already have a home with the mortgage, I will stay as is right now. Because of the cheap cost, and high inflation, even if the market were to go down, it is unlikely to lose money in a few years. If you were to borrow money right now and purchase with like 6~7% interest rate, I will say don't do it, it is not worth it in this uncertain market. There is a higher chance of going down rather than going up. The spread for inflation vs interest is too small. In a few years, the rate will be get normalized, so the inflation.


If you can get a rate of around 5%, I think it is still a good time to buy for now, for the above reason. The rent will go up, and it will be possible for you can rent out as one of your solutions to existing the strategy.


But for most, let's stay healthy. That is the most important thing in this world. I got COVID a few weeks ago and it was painful for sure that I can say. Stay safe and Have a wonderful day.



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