Mortgage + Hyperinflation = ?

[Bean]

I believe we are in a secular deflation trend.  However, the FEDs current intervention creates a high probability of hyperinflation sooner rather than later.

So, what does mean for mortgage holders?  What is the best way to prepare?

[MediumTex]

Get a fixed rate mortgage.

If rates drop, refinance.  If rates increase, stick with what you've got.

[Kshartle]

Mortgage + Hyperinflation = Lot's of problems, hope you have portable wealth. Hyperinflation is not pleasant. If you had very little equity in the home to begin with you're not out much. If you can protect it and ride it out and had a big mortgage wiped out then congrats you're not in bad shape, you got a free home. It might not be worth very much compared to gold but it's better than paper.

Browne wrote a lot about real estate and Hyper inflation and he generally came to the conclusion was it's better to be a renter unless you're in a rural area that is pretty self-sustaining. Imagine trying to protect your condo in NYC should the dollar go kaput.

[iwealth]

Mortgage + Hyperinflation = Lot's of problems, hope you have portable wealth. Hyperinflation is not pleasant. If you had very little equity in the home to begin with you're not out much. If you can protect it and ride it out and had a big mortgage wiped out then congrats you're not in bad shape, you got a free home. It might not be worth very much compared to gold but it's better than paper.

Browne wrote a lot about real estate and Hyper inflation and he generally came to the conclusion was it's better to be a renter unless you're in a rural area that is pretty self-sustaining. Imagine trying to protect your condo in NYC should the dollar go kaput.

That's interesting. Didn't consider hyperinflation being a negative thing for fixed rate mortgage holders. Although I guess property taxes and maintenance would lay a beating down on you.

But renting...strikes me you could get crushed there with rent increases.

[MediumTex]

Mortgage + Hyperinflation = Lot's of problems, hope you have portable wealth. Hyperinflation is not pleasant. If you had very little equity in the home to begin with you're not out much. If you can protect it and ride it out and had a big mortgage wiped out then congrats you're not in bad shape, you got a free home. It might not be worth very much compared to gold but it's better than paper.

Browne wrote a lot about real estate and Hyper inflation and he generally came to the conclusion was it's better to be a renter unless you're in a rural area that is pretty self-sustaining. Imagine trying to protect your condo in NYC should the dollar go kaput.

Why would a home not be worth very much compared to gold in a hyperinflation scenario?

Shouldn't the gold/home ratio remain pretty stable over time, regardless of what is happening with the currency value? 

To me, gold is just another hard asset with value that is recognized by almost everyone.  I would say that a home has a lot of the same characteristics, plus you can live in it.

[MediumTex]

Mortgage + Hyperinflation = Lot's of problems, hope you have portable wealth. Hyperinflation is not pleasant. If you had very little equity in the home to begin with you're not out much. If you can protect it and ride it out and had a big mortgage wiped out then congrats you're not in bad shape, you got a free home. It might not be worth very much compared to gold but it's better than paper.

Browne wrote a lot about real estate and Hyper inflation and he generally came to the conclusion was it's better to be a renter unless you're in a rural area that is pretty self-sustaining. Imagine trying to protect your condo in NYC should the dollar go kaput.

That's interesting. Didn't consider hyperinflation being a negative thing for fixed rate mortgage holders. Although I guess property taxes and maintenance would lay a beating down on you.

But renting...strikes me you could get crushed there with rent increases.

In a hyperinflationary scenario, wages would be rising dramatically along with other prices.  I don't see why you wouldn't be able to pay your inflated property taxes with your inflated earnings.  As Warren Buffett said, the best inflation hedge is a marketable skill.

With that said, retired people who didn't have significant investments might be put in a bad spot by increases costs associated with their homes.

[Bean]

I think there are three phases that impact this question. With phase 2 or mid hyperinflation being the real tricky part.

Phase 1: Pre-Hyperinflation
Stable wages and costs, you are contributing to your PP

Phase 2: Hyperinflation
Prices going through the roof, wages can't keep up. Food, water, and other essentials start to crowd out your mortgage payment.  This is the part I struggle with, how do you prepare for this part.

Phase 3: Post Hyperinflation
A new currency valuation is established; prices and wages stabilize.  You Gold in your PP has done its magic and you can pay off your mortgage.

[moda0306]

MT,

Since a hyperinflation is a form of societal collapse, I have to agree with Kshartle here.  You can fit the value of a home in your backpack by putting 8 lbs of gold in there.  Real estate also depends on government deeding for a decent amount of its value.  Housing is very illiquid, and gold has all those wonderful traits of money we learned about in college (or on this forum).

They are simply very different assets.  Portable, monetary assets are going to do far, far better in a hyperinflationary collapse (IMO), than housing in the very neighborhoods that are deterioratig on some level due to the said collapse.

Further, because housing is an investment that will pay off slowly over time, people tend to rightfully go into debt to buy it.  I'd imagine that after a hyperinflation there is enough of shakeup in the credit markets that housing is more difficult to secure with credit.

So not adjusting for the advantages of using a 30 year mortgage with the housing option, I'd take 8 lbs of gold any day before a home approaching a hyperinflation.

[moda0306]

I think there are three phases that impact this question. With phase 2 or mid hyperinflation being the real tricky part.

Phase 1: Pre-Hyperinflation
Stable wages and costs, you are contributing to your PP

Phase 2: Hyperinflation
Prices going through the roof, wages can't keep up. Food, water, and other essentials start to crowd out your mortgage payment.  This is the part I struggle with, how do you prepare for this part.

Phase 3: Post Hyperinflation
A new currency valuation is established; prices and wages stabilize.  You Gold in your PP has done its magic and you can pay off your mortgage.

Bean,

I tend to think you find some of the best things to use to purchase or barter for those items in a hyperinflation.  Stocking up on canned food and water is reasonable to an extent, but methinks using your gold at this point would be the optimal move.

[MediumTex]

I think there are three phases that impact this question. With phase 2 or mid hyperinflation being the real tricky part.

Phase 1: Pre-Hyperinflation
Stable wages and costs, you are contributing to your PP

Phase 2: Hyperinflation
Prices going through the roof, wages can't keep up. Food, water, and other essentials start to crowd out your mortgage payment.  This is the part I struggle with, how do you prepare for this part.

If prices are going through the roof and wages aren't keeping up, where are people getting the money to pay the higher prices?  I would say that part of preparing for this scenario is being able to answer this question.  My answer is that prices will ultimately be constrained by wages, since people can only buy things until they run out of money.

Phase 3: Post Hyperinflation
A new currency valuation is established; prices and wages stabilize.  You Gold in your PP has done its magic and you can pay off your mortgage.

You could pay off your mortgage with your next paycheck.  No PP assets would be needed for that.  The hyperinflation would have made the mortgage comically easy to pay off.

[MediumTex]

MT,

Since a hyperinflation is a form of societal collapse, I have to agree with Kshartle here.

Societal collapse is rarely part of a hyperinflationary scenario.  There is runaway inflation in many countries today, but few of them are experiencing societal collapse.  Spin your globe and you will see what I mean. 

You can fit the value of a home in your backpack by putting 8 lbs of gold in there.  Real estate also depends on government deeding for a decent amount of its value.  Housing is very illiquid, and gold has all those wonderful traits of money we learned about in college (or on this forum).

They are simply very different assets.  Portable, monetary assets are going to do far, far better in a hyperinflationary collapse (IMO), than housing in the very neighborhoods that are deterioratig on some level due to the said collapse.

Gold is certainly a great asset in times of hyperinflation.  I would just say that real estate is probably also a pretty good asset to own in a hyperinflationary period, especially if it is something as useful as a house.

Further, because housing is an investment that will pay off slowly over time, people tend to rightfully go into debt to buy it.  I'd imagine that after a hyperinflation there is enough of shakeup in the credit markets that housing is more difficult to secure with credit.

I wouldn't care because I would have paid off my house long before with devalued dollars.

So not adjusting for the advantages of using a 30 year mortgage with the housing option, I'd take 8 lbs of gold any day before a home approaching a hyperinflation.

Really?  Even considering the fact that everyone needs a place to live?  You're comment suggests that you won't have any lodging needs during the hyperinflationary period.

[moda0306]

MT,

"Societal collapse" was probably the wrong word.  There's definitely some unexpected breakdown in an aspect of the social construct as a result.  I think I could pay for lodging fine with gold... but that was an either or scenario.  Personally, I'd take my own home with a mortgage and a bunch of gold, understanding that the gold will probably outperform the real estate.

However, if I think government is going away along with the currency, am I really to trust that my house is truly "mine?"  I mean I'd like to think so but the uncertainty alone might decimate the real price of housing.

I tend to think the higher prices come as a result of a production collapse, not people just making gobs and gobs more money.  If our economy is simply giving up on providing what people need, it's going to to make those things astronomically more expensive.  If our society questions whether the US government is even going to be around (as is associated with some hyperinflations), then we have a scenario where production could truly collapse, leaving the same (or more) dollars chasing vastly fewer goods.  It's not that we have higher incomes to pay the higher prices, it's that the supply has been decimated.

[AgAuMoney]

The weimar republic did rent controls.  Basically put landlords out of business.

After the hyperinflation had ended, the gov't also restated bonds and mortgages.  After 1924 the new Reichsmark was approximately 1 for 1 trillion old.  Then when they restated, if the mortgage was 5+ years old, it was restated to 25% of face value.  Gov't bonds were restated to 2.5% of face value.  Many bankruptcies ensued.

In other words, if you had a mortgage for 40,000 of the old, you would be required to repay 10,000 of the new.  But if you were counting on your 40,000 in old gov't bonds to pay it off, better get a job because they were only worth 4,000 of the new.  And if you had 10,000 old cash in your underwear drawer, might as well burn it (the cash) because to trade it in you would only get 10,000/1,000,000,000,000 or 1/10,000,000 of the new.

In 1914, when they broke their gold standard, the mark was at 4.2mark/$US, or approximately 8.6mark/OzT.

By mid-November 1923, multiply that by 1 trillion, or 10^12.  Gold was 87 trillion/OzT.

If you had gold in your sock drawer, you could pay your mortgage after the restatement, and come out ahead.

[annieB]

So that explains why we hold gold.
And it explains why German folks are slow to smile..

[D1984]

The weimar republic did rent controls.  Basically put landlords out of business.

After the hyperinflation had ended, the gov't also restated bonds and mortgages.  After 1924 the new Reichsmark was approximately 1 for 1 trillion old.  Then when they restated, if the mortgage was 5+ years old, it was restated to 25% of face value.  Gov't bonds were restated to 2.5% of face value.  Many bankruptcies ensued.

In other words, if you had a mortgage for 40,000 of the old, you would be required to repay 10,000 of the new.  But if you were counting on your 40,000 in old gov't bonds to pay it off, better get a job because they were only worth 4,000 of the new.  And if you had 10,000 old cash in your underwear drawer, might as well burn it (the cash) because to trade it in you would only get 10,000/1,000,000,000,000 or 1/10,000,000 of the new.

In 1914, when they broke their gold standard, the mark was at 4.2mark/$US, or approximately 8.6mark/OzT.

By mid-November 1923, multiply that by 1 trillion, or 10^12.  Gold was 87 trillion/OzT.

If you had gold in your sock drawer, you could pay your mortgage after the restatement, and come out ahead.

AgAu,

Are you saying that even if someone had paid off  their mortgage during the hyperinflation, the government put the loan back in place at 25% of the old value in new marks? Or did that only apply if the debtor hadn't managed to pay off the mortgage by then? If the former, I'm not sure the US government could (in an event something like that happened here) even legally reimpose a debt that had already been paid off, hyperinflation or not.

[AgAuMoney]

Are you saying that even if someone had paid off  their mortgage during the hyperinflation, the government put the loan back in place at 25% of the old value in new marks? Or did that only apply if the debtor hadn't managed to pay off the mortgage by then? If the former, I'm not sure the US government could (in an event something like that happened here) even legally reimpose a debt that had already been paid off, hyperinflation or not.

My understanding is only if the loan was still outstanding.  I plan on paying my loans off as soon as possible in such a scenario, likely soon after the first or second 0's have been added to the money.  (Essentially similar to the past 100 years of inflation in the U.S. or about late-1921 or early-1922 in the Weimar Republic.)

The other issue is that mortgages and other contracts could be unilaterally changed by the gov't, just like they did when they made the gold clause illegal.  After 2008-10 do you really think the gov't would not rewrite or violate the law to help the banks?

I'm not very optimistic of the U.S. following laws which would hurt the gov't or which would be politically unpopular.  The treatment of G.M. corporate bond holders in the last bailout was a direct breach of contract law.  The collection and confinement of those Americans of Japanese ancestry during WW-II would have been illegal a few years earlier.  Nixon closing the gold window was a violation of international treaty.  The end of silver redemption in the 1960's and gold redemption in 1933 were illegal, except they changed the law to accomodate it.  Forcing lenders to accept dollars instead of the contractually mandated gold (the gold clauses were made illegal) would have been illegal, but...  There are many, many, many examples.

[smurff]

I'm not very optimistic of the U.S. following laws which would hurt the gov't or which would be politically unpopular.  The treatment of G.M. corporate bond holders in the last bailout was a direct breach of contract law.

I'm not optimistic that the gov would follow laws that would chastise anyone politically connected.  We're still waiting for Jon Corzine' s arrest on a variety of charges related to MSGlobal.  And the too big to fail banks are still run by the same banksters who are now too big to jail.

[Libertarian666]

If there is going to be hyperinflation (which I think is a high probability at some point), having the biggest possible mortgage is the right approach, assuming they haven't made gold illegal to hold by that point, of course. You should be able to pay it off with one ounce of gold.

I wouldn't want to be in a city at that point, but as it happens, my house is in the country... and has the biggest mortgage I could get on it, at 2.65% for 15 years. What an amazing coincidence!