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Real Estate

Home Buying Power

We will discuss home buying power and how it will affect your ability to buy or sell a home. In addition, we will talk about the current real estate market and trends for the future.        

In many ways, home buying power is synonymous with purchasing power. When the US Dollar is strong and inflation is kept in check, your home buying power is strong and you get more for your money.

What is purchasing power?

“Purchasing power is the value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing power is important because, all else being equal, inflation decreases the amount of goods or services you would be able to purchase.”

Investopedia

Currency Inflation

One thing that significantly affects inflation and home buying power is money printing. When the US Treasury and the Federal Reserve Bank coordinate to print large amounts of money, it causes inflation. Inflation is simply an increase in the money supply. The bigger the money supply, the less the money in your wallet is worth. Moreover, inflation is a hidden tax. As a result, money you have in your bank account loses home buying power when money is printed by the government.

On March 23, 2020, it was announced that the US Government would be giving out stimulus checks to Americans. In addition, they planned to give money and loans to businesses hurt by the COVID-19 epidemic. Almost overnight, approximately $2 Trillion in loans and grants were printed out of thin air. At the same time, home buying power decreased. As a result, the internet went viral in creating money printing memes. One of those memes was the now infamous “money printer go brrrr” meme.

Consumer Price Index

According to the US Bureau of Labor Statistics, the consumer price index has increased 1.3% in the past 12 months (before seasonal adjustment).

“The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available.” -The US Bureau of Labor Statistics, Definition of Consumer Price Index (CPI)

A consumer price index value of 1.3% seems reasonable for 2019-2020. If inflation or the CPI were only 1% per year, that means that in 100 years one US Dollar would lose about half its purchasing power. For example, $100 in 1920 would only purchase $50 worth of goods in 2020. However, real inflation for items we buy every day is much higher. In addition, we’ll soon see what the real inflation values are, and they are not pretty. All of these measures hurt your home buying power whether you realize it or not.

Inflation Calculator

The US Dollar Has Declined in Purchasing Power Since 1913; The Stated CPI Does Not Reflect Real Price Increases

In addition, the US Bureau of Labor Statistics provides a handy Inflation Calculator. Using their calculator, you can estimate what home buying power (based upon inflation) is today compared with years past. For example, $10 in 1960 is equal to $88.71 today. That means that in the 60 years prior to 2020, the dollar has suffered 887% inflation over time.

Since the Federal Reserve Bank was formed in 1913, the dollar has been in steady decline. Moreover, the dollar’s purchasing power (aka, home buying power) has decreased dramatically since 1913. For example, using the US Bureau of Labor Statistics CPI calculator, the US Dollar has lost approximately 96% of its purchasing power since 1913. Finally, this is an alarming statistic that shows how home buying power can fall.

Home Buying Power Changes in the Past 60 Years

Food Prices Have Lower Inflation Values; Housing Prices Have Increased Dramatically in 60 Years

Let’s look at how home buying power has changed and some specific examples of prices in from 60 years ago (1960).

According the website 1960s Flashback, in 1960 one US Dollar could purchase:

  • 25 first-class stamps for $1
  • slightly more than 3 gallons of gas for $1
  • nearly 2 dozen eggs for $1
  • 2 gallons of milk for $1

First, the price of a new home in 1960 was approximately $16,500. According to The Ascent, a family home costs $280,600 in the year 2020. As a result, this is a 1700% increase in home prices from 1960. It seems clear that a 1700% increase in 60 years is an outrageous assault on home buying power.

Using the US Bureau of Labor Statistics provides a handy Inflation Calculator, we can see that the US Dollar has become weaker. On average, goods and services are (on average) 887% more expensive today, compared with 1960. Specifically, one US Dollar today has lost approximately 89% of its purchasing power since 1960.

Can You Purchase a Home with One Year’s Salary? 60 Years Ago, You Could

In Mike Maloney’s video series, “Hidden Secrets of Money: Episode 6”, he discusses the wealth distribution cycle. As an example, Mr. Maloney displays his father’s 1955 tax return. His father was an auto parts store manager in Salem, Oregon during this time. For instance, he earned approximately $9,600 per year.

What’s interesting is the average home cost during this time period in comparison with his salary. According to US Census Bureau data, the median price for a single-family home in Oregon ranged between $6,800 in 1950 and $10,500 in 1960. Moreover, his father’s annual salary was almost equal to the median home price during this time. Now, consider the average salary today and the price of homes. In contrast, could you purchase a home with your annual salary? Clearly things have changed and the home buying power for Americans has fallen significantly.

Where Should I Buy a Home?

Shifting Populations: People are Leaving the Big Cities

It’s important to understand that real estate prices are likely going to decrease in the near future. Namely, the reason for this is that demand will begin to shrink to reflect a weak economy. In addition, migration will slow. However, there will be winners and losers in the market short term. For example, it appears that in the short term, a divided real estate market may present itself. In addition, keep in mind that each city has its own real estate market that varies.

Current data being reported in the media shows people leaving larger coastal cities and going to smaller inland cities. For example, Californians have been moving out of California to places like Washington, Arizona and Texas in record numbers. This is not a new phenomenon and the trend appears to be gaining speed.

As a result, larger coastal cities like Los Angeles and New York City are seeing reductions in demand for real estate as residents leave the cities permanently. In turn, smaller cities like Phoenix and Las Vegas are experiencing higher demand for real estate as residents move in from the coastal cities.

It appears that in the short term, cities where people are moving to (like Las Vegas) may see higher prices during the coming real estate bubble deflation. The worst-case scenario for cities receiving the influx of those moving from elsewhere would be that property values would remain steady.

Juxtaposed to this phenomenon, larger cities are seeing an increase in available real estate, causing supply to outpace demand. As a result, prices are already dipping lower in cities seeing a mass exodus.

Are You in a Growing or Shrinking Market?

The lesson here is that in order to make logical real estate market predictions for your home market, determine whether you are in an area where people are moving to or from. For example, if you live in Phoenix, Arizona, you are probably in a strong market that is attracting Californians. As a result, prices will likely be stable or even positive in the near term.

Now, one other caveat to consider is the state of the economy currently. Unfortunately, unemployment rates are high the US. Higher unemployment rates are negative for home buyers and are typically seen as a harbinger for decreased demand. As a result, unemployment may cause a decline in home buying nationwide. But we still haven’t answered the question of where the best place to buy rental property might be. Let’s take a closer look at demographics.

Demographic Changes

In “The Demographic Cliff” by Harry Dent, it is noted that the baby boomer generation (“Boomers”), those born between approximately 1946-1964, are retiring now. As a result, these baby boomers will be down-sizing from larger homes to smaller homes and buying vacation homes.

Prior to the COVID-19 Pandemic people were already beginning to shift in where they lived and how they lived. Now, the changes in living patterns and demographics have been accelerated. In general, more people will move out of bigger cities and move to areas with less dense populations. For example, people are moving out of cities like Los Angeles and moving to places like Idaho.

Individuals are selling expensive homes and flats and buying more affordable properties to replace the high priced, big city real estate. Boomers are selling their large family homes and moving into smaller, more affordable homes.

What to Expect: Future Home Buying Power

Hopefully we have shed some light on your understanding of home buying power. Clearly, inflation has had a significant impact on prices over the past 100 years. The purchasing power of the US Dollar has declined significantly over that period. Moreover, the past is never a good indicator for what may occur in the future. However, in this case it seems clear that inflation of the Dollar will continue. We can expect more inflation in the United States and expect the US Dollar to weaken in its home buying power over time.  However, with low interest rates, it still may be a good time to purchase a home.

Read More:

Best Place to Buy Rental Property

Why Saving Money is Important

Investment Houses

10 Things to Know Before Starting a Budget

US Dollar History: How the Dollar Became the World Reserve Currency

How Much Savings You Should Have at 40

Ways to Save Money on a Tight Budget

Best Budget Planner

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