Homes and the Dollar

Too many people are not aware that the dollar has lost over 95% of its purchasing power since the Federal Reserve was created in 1913. What does that mean? Simply that the dollar is just a six inch piece of paper. At first it was (supposedly) backed by gold. U.S. coins were even gold and silver. Wars and political abuse (political promises of freebies for votes) eventually caused the government to print more and more paper. Richard Nixon finally took the dollar off the gold standard so he could print more and more to pay for the Vietnam war.

Things haven't changed. George Bush has his war and there is not enough money to pay for it. So what does the government do? Simply print more dollars. News came this past week that the budget deficit for February came in at $113.9 billion; that is a whole lot of money. The government is spending money like a drunk sailor; to pay for the deficit the only recourse is to print more money.

What does that have to do with homes? Nothing if you don't care about the value of your home or your investment properties; most people don't need to care. If value in terms of dollars matters to you, then you might be interested. That's because the more dollars that are printed, the less each dollar is worth; a function of supply and demand. Many folks think they're getting richer because their houses are worth more; in fact, their houses are worth the same, but the dollar is worth less.

The Dallas/Fort Worth area has had an increase in values pretty much on par with the decrease in the value of the dollar. I don't think we face a huge bubble real estate market here. In other areas of the country, the air is quickly coming out of some of those very large bubbles.

If you are buying highly-leveraged investment properties in this local market, you stand a good chance of coming out ahead; assuming your rents cover your payments. In other parts of the country it is almost a certainty that there will be "blood in the streets."

In the mid 1960's I was working for a builder in San Antonio while I attended college. Our houses (3-2-2 homes with brick fronts) were going for an average of $10,000 each. They were nice houses, though not as large or as loaded with amenities as modern new homes. Those are $100,000 houses today. The question is: Have those houses gone up in value? The answer is a resounding NO. I bought a new Volkswagen in 1968 for $1,800, you'd pay $18,000 today. You could buy a new Cessna two-seat airplane in 1966 for $15,000, you'd pay $150,000 for that same airplane today.

What's happened? The dollar has been decimated by overprinting. When looking at real estate one should not necessarily look at appreciation; more often than not it's all a matter of dollar depreciation.

The lesson here is that real estate is a great hedge on inflation. If you want to hold the value of your money, and keep the politicians from taking you to the cleaners with their "hidden" tax (overprinting of money), your home is a good weapon; and the right investment properties are even better.