Red-Hot Inflation Protection

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PPI inflation comes in at the highest annual rate since 2010 … one asset class that will protect your wealth all decade long … a new, tech-based way to play it

 

Two weeks ago, the headline PCE Index (personal consumption expenditures) rose again, both on a monthly and year-over-year basis.

However, because its month-to-month growth came in 0.1% lower than June’s growth rate, some in the press were quick to declare that inflation is cooling off.

Here was one such proud headline:

Inflation is cooling off just as economists, the Fed, and Biden expected

I’m curious what spin they’ll put on last Friday’s train wreck inflationary data…

From CNBC:

Prices that producers get for final demand goods and services surged in August at their highest annual rate since at least 2010, the Labor Department reported Friday.

The producer price index rose 0.7% for the month, above the 0.6% Dow Jones estimate, though below the 1% increase in July.

On a year-over-year basis, the gauge rose 8.3%, which is the biggest annual increase since records have been kept going back to November 2010. That came following a 7.8% move higher in July, which also set a record.

Now, a naysayer could say, “Jeff, once again, you’re missing the point. The PPI rose 0.7%, which is lower than July’s 1% increase. So, inflation is cooling.”

Is it?

As an analogy, let’s say that over four consecutive days, the temperature comes in at 88 degrees, 92, degrees, 95 degrees, 97 degrees, and then 98 degrees.

The temperature differential between these consecutive days is, respectively, 4, 3, 2, and 1.

So, the rate of temperature increases is cooling. But is the temperature itself cooling?

No.

On Day 1, it was 88 degrees. On Day 4, we’re up to 98 degrees.

In the same way, if last month’s inflation data comes in at 1%, and this month’s is 0.7%, that doesn’t mean inflation is cooling off. It means the rate of increase is cooling…but inflation is still climbing.

Now, I’m not here predicting hyperinflation, doom and gloom, or even saying that inflation is here to stay. I believe pockets of our current inflation are, in fact, “transitory” and will recede.

But I am saying that the data are telling us that inflation continues to rise. And given the trillions of dollars of new currency flooding our economy, it’s likely to persist longer than many expect, despite what various headlines suggest, even after certain supply chain bottlenecks have eased.

***In the past, we’ve suggested dealing with this through investing in high quality stocks, gold, elite cryptocurrencies, and real estate

Today, let’s look closer at real estate as a wealth-preservation vehicle.

For any readers unaware, the real estate market has been on fire for months.

From CNBC:

Home prices rose 18.6% annually in June, up from the 16.8% increase in May, according to the S&P CoreLogic Case-Shiller national home price index.

That is the largest annual gain in the history of the index dating back to 1987. Prices nationally are now 41% higher than their last peak during the housing boom in 2006.

Unlike other median price surveys, which can be skewed by the type of homes selling, this measures repeat sales of similar homes over time.

Certain pockets of real estate are seeing mind-boggling price increases. For example, prices in Phoenix increased 29.3% year-over-year. In San Diego, they’re up 27.1%. Seattle is up 25.0%.

Specific absurdities are everywhere.

For example, one San Jose area homeowner put the burned-out home below on the market in April for $800,000.

Photo of a burned out house - uninhabitable - that recently sold for $900K
Source: kpbs.org

It sold for over $900,000 — in less than a week

What’s behind this – and what makes real estate a reasonable safeguard for your wealth despite price surges, is one thing…

An enormous lack of housing inventory.

***Low supply and high demand are frustrating would-be homeowners

In June, the National Association of REALTORS® (NAR) hired Rosen Consulting Group to dive into what’s behind skyrocketing home prices, and what it means for the future.

Here’s the executive summary:

Following decades of underbuilding and underinvestment, the state of America’s housing stock, which is among the most critical pieces of our national infrastructure, is dire, with a chronic shortage of affordable and available homes to house the nation’s population.

The housing stock around the nation has been widely neglected, with a severe lack of new construction and prolonged underinvestment leading to an acute shortage of available housing, an ever-worsening affordability crisis and an existing housing stock that is aging and increasingly in need of repair—all to the detriment of the health of the public and the economy.

The scale of underbuilding and the existing demand-supply gap is enormous and will require a major national commitment to build more housing of all types by expanding resources, addressing barriers to new development and making new housing construction an integral part of a national infrastructure strategy.

It turns out the U.S. built, on average, 276,000 fewer homes per year between 2001 and 2020 compared to the years between 1968 and 2000.

Here’s Forbes with what rectifying this gap will require:

To make up the shortage, the NAR report says the U.S. would have to build 2.1 million homes each year for a decade—more than it built each year during the housing boom of the mid-2000s.

Bottom-line, yes, real estate prices are surging. But the basics of supply and demand suggest we’re nowhere close to reaching pricing equilibrium.

***How to play it with your money

Physical real estate is your first option.

Of course, that requires an awareness of specific markets to make sure you’re buying at a reasonable price.

It’s also incredibly cash intensive.

Today, a handful of online platforms are changing this by offering fractional ownerships in residential and commercial real estate. This can be through investments in specific homes or commercial developments, or a fund with exposure to a broad portfolio of properties (similar to a private REIT).

These platforms offer investors a passive way to be a rental real estate owner without having to know all the details of a specific, localized market, and without the hassle of vetting tenants or, say, getting a call to replace a broken hot water heater at 2 p.m. on a Saturday when you’re on the golf course.

Four of the most popular platforms are CrowdStreet, RoofStock, RealtyMogul, and FundRise. They vary by required investment size, fees, type of investment property, and whether they require accreditation, among other differences.

***You can also play the boom through publicly-traded homebuilding companies

First, to target new-home construction, there’s ITB, which is the iShares U.S. Home Construction ETF.

It holds homebuilders and home improvement companies, including D.R. Horton, Lennar, Home Depot, Lowe’s, and Sherwin-Williams.

We first put ITB on your radar in our January 23, 2020, Digest. Since then, it has outpaced the S&P 49% to 35%, as you can see below.

Real estate ETF, ITB, beating the S&P 500 since Jan 2020
Source: StockCharts.com

Given that ITB is an ETF, its returns are diluted by some of its weaker holdings. So, if you’re looking for potentially-larger gains, you can look at specific homebuilding stocks.

For example, over the last 12 months, D.R. Horton (a holding in ITB) has climbed 89% compared to ITB’s 73%, as you can see below.

Homebuilder DHI beating ITB over the last 12 months
Source: StockCharts.com

***But there’s a new, ancillary way to play real estate

It combines traditional real estate with technology.

Hers’s our hypergrowth expert and the editor of Innovation Investor, Luke Lango, with more:

iBuying is the trendy term given to the new process of selling your home online to a technology company, dubbed an iBuyer.

In short, the iBuyer leverages data and algorithms to give you a real-time, all-cash offer on your home, performs a quick inspection to finalize that offer, and then closes the deal in as little as two weeks.

iBuying offers significant benefits over the traditional home shopping process.

It’s cheaper (most iBuyers take around 5%–7% fees versus 10%-plus all-in costs for the traditional home selling process).

It’s faster (these transactions can close in as little two weeks).

It’s less complex (it’s a one-to-one process between the iBuyer and the homeowner).

It’s less volatile (you get to choose your own closing date, and you always get a much more reliable all-cash offer).

iBuying is the future. Eventually – and inevitably – all home shopping will move online.

There’s one iBuying company that Luke is incredibly bullish on today. In fact, he believes it will be a 10X winner in the coming years.

I can’t reveal the name out of respect for Luke’s paying subscribers, but I will say if you haven’t been aware of this iBuying corner of the real estate market, check it out. It’s the future of real estate transactions.

Wrapping up, inflation is here – and rising. And while it will eventually “cool off,” in the meantime, we’d all be wise to take steps to protect the purchasing power of our wealth. And real estate will provide many years of such protection.

Have a good evening,

Jeff Remsburg


Article printed from InvestorPlace Media, https://investorplace.com/2021/09/red-hot-inflation-protection/.

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