Why is it a Great Time to Buy a House? And Maybe Even Get into Debt.

In the last year, more than $5,000,000,000,000 was added to our economy through various stimulus programs. That brings our national debt to almost $30,000,000,000,000. The United States raises this money buy selling treasury bonds. The Federal Reserve and other countries buy our bonds. And then we pay back the bonds with interest.

The bond market is like any other market, driven by supply and demand. When other countries see us in good standing as a secure investment, they buy our bonds. The more people that buy our bonds, the lower the interest rate. It’s seen as a stable, low risk investment, and therefore the interest reflects the low risk.

Well, today, other countries don’t want to buy our bonds as much as they used to. The drop in demand causes interest rates to go up, enticing other countries to buy bonds with a better return. Our $30,000,000,000,000 debt is all bonds and accrues interest. Because we’re seen as so stable and are the reserve currency of the entire world, our rates are low. In fact, they have to stay low. The United States government could not afford to service the $30T debt if interest rates were to go up. They do not have the money to make the payments, and would default. That’s not good, considering bonds are seen as one of the most stable investments.

This is where the Federal Reserve steps in. The Federal Reserve makes up the difference when other countries opt out of buying our bonds. When the Federal Reserve steps in and buys a bunch of bonds, the demand is increased and the interest rates are kept low.

How does the Federal Reserve buy bonds? Well, it prints money, so to speak. It creates the dollars out of thin air, sends them to the United States government in exchange for the bond. The problem with this, is that they have to keep printing money. It’s a vicious cycle. The more in debt we are, and the less value the dollar has, the less other countries want our debt. So the Fed has to buy more. Until they’re buying $120,000,000,000 of US bonds a month, flooding the economy with US dollars.

This is terrible for the US dollar, which decreases in value as the supply increases. There’s not much demand for something with an infinite supply, like the US dollar. This creates inflation. Prices of goods go up. Prices of scarce goods go way up. Has anyone taken a look at the booming real estate market over the last year and a half? Could it be that everything is going over asking and for cash, because the market is flooded with money?

The Federal Reserve says it tries to maintain inflation at 1.7-2%, but that’s not really true. The way the consumer price index and inflation are calculated change all the time in an effort to keep the stated numbers low. The government wants to keep the appearance of low inflation, because it saves them money. They don’t have to adjust government employee’s salaries, benefits, social security. Inflation also works to their benefit because it makes the debt less significant, and essentially becomes a tax on those who hold US dollars.

If the Fed didn’t step in and buy bonds, and the interest rate on the $30T went up, the US government would not be able to service the debt and would have to default. This would probably be worse than any financial crisis that we’ve seen. Therefore, I believe the Fed will print money to buy bonds ad infinitum.

Now how does this relate to you as a potential home buyer? Well, dollars aren’t scarce, but real estate is. And the rarer and more scarce the real estate, the better it will hold its value. If I were sitting on a bunch of cash right now, I would buy real estate. In Boston especially, because there were always be demand here. People want to live here, and will continue to want to live here. Holding real estate is one of the best ways to preserve your wealth. Don’t think of the value of the property in dollars that are continually losing value. Think of your real estate holdings in terms of purchasing power. How well does it hold its value compared to other assets, like gold and stocks? Pretty well. Housing is a necessity. People always need a place to live.

If you already own a home, but still have significant wealth stored in the form of cash, an income property could be the right move for you. As of the last year, the rental market has taken a hit, but as we start to open back up and schools resume in person classes, I see the rental market coming back. An income property is great, because the property itself stores your wealth, while also generating cash flow at the market rate. If money printer keeps going brrr, you can keep raising your rents.

If you really want to get into it and already have good cash flow that you’re sure you can maintain, now is a great time to get into debt. Let me explain. Interest rates are low, and the dollar is losing value every day. You’re looking at essentially free money. You’re borrowing money now, to buy an asset that will retain its value. And you’re paying the money back in the future, when it’s far less valuable.

Keep in mind, I’m not an economist, a financial advisor or anything like that. I’m not even sure if I graduated from college. I’m just a Realtor throwing out some ideas.

If you want to talk further, you can email me at willy.charleton@nemoves.com or call/text me at 617 528 8461.