Wednesday, October 20, 2010

$15 Trillion Gone!

There is a large concern, especially in the USA that the deficits currently being ran by the Obama administration are highly inflationary. It seems obvious at first blush that they are. The projected deficit for 2010 is 1.17 trillion.

Immediately many people think, lets start buying inflation hedges. The best example being gold. The price of gold is the highest it has ever been and it is currently $1,345.44/oz.

On the other side of this is a huge deflationary hole of $15 trillion caused by the housing price collapse in the USA. The numbers look like this and the sources are Wikipedia and The American Institute for Economic Research (AIER).

USA Population 2010 310,467,000 Wikipedia
People/Household 2.59 AIER
% Own Homes 2008 64% AIER
% Renting 36% AIER
Average House Price 2007 $313,600 Wikipedia
Average Rental Price 2007 $156,800 50% Less
Price Reduction 2007-2010 50% Assumption
Net Loss $15,412,588,800,000
NB Price reduction in 2008 was 20% (Wikipedia). No numbers available for 2009 and 2010. Assume 20% also for 2009 and you are getting very close to 50% without considering any price drop in 2010.

Read 15 trillion dollars!

So, the question is which number has a bigger effect on inflation? A $15 trillion dollar reduction in real estate wealth in the USA or budget deficits of $1.17 trillion per year.

The take away is no inflation in the short term and very real prospects of deflation. The net is bet on at least 7 or 8 years of very slow growth. A $15 trillion hole is an awfully big hole to fill.

So, what does that mean for recreational property buyers? Unfortunately for developers no urgency on the part of buyers. Prices will remain stagnant for many years to come. So, the issue for buyers is how soon do you want to be enjoying that special recreational retreat?

The time tested approach to building wealth in Canada has been to buy real estate and wait. Not wait to buy real estate. I think the same can be said for recreational enjoyment. These years that you have now are often the most precious. We often don't realize that until we are looking in the rear view mirror. So, while selection is good, you don't have to offer on the first property. However, for the property that lines up with your needs, hopes, and desires make an offer and get it done!