“The Debasement Trade”: Home Values Climb, But Is the Dollar Value Real?

On Wall Street, they call it the debasement trade. Here’s what the concept means. As the U.S. dollar loses value, some investors are moving their cash into things like gold and real estate. They’re trading…in favor of hard assets.

Homes are “hard assets”, but are they actually holding their value? We all know the story about rising property values (and property taxes!) but how does home value appreciation support the deed holder, day to day?

Here, we briefly explore the debasement trade that financial pundits keep talking about, and what it means to the ordinary soul who’s just hoping to keep up with inflation.  

A JPMorgan Analyst’s Catchy Phrase

Nikolaos Panigirtzoglou at JPMorgan published a note that mentioned “the debasement trade.” It caught on. The “trade” refers to the current trend in buying hard assets, as opposed to money funds, as hedges against snowballing government debt and inflation.

“De-dollarization entails a significant reduction in the use of dollars” in international trade, as J.P. Morgan stated the point a few months back, “decreasing national, institutional and corporate demand for the greenback.” And there is, in fact, a visible trend, in Asia and other parts of the world, to depend less on the U.S. dollar.

What’s the matter? The current administration has a $2 trillion deficit and shows no sign of reducing it. Earlier this year, the Government Accountability Office projected that the U.S. debt could approach a figure near twice the size of our gross domestic product by 2050.

What’s the plan? What does the government do to deal with extraordinary levels of debt? When it decides to do so, the federal government can print money. But this is a vicious cycle. Issuing more money has the effect of diluting the worth of a current dollar. That, too, “debases” U.S. currency.

See what they did there? With the dollar devalued, a government can make payments on its debts with money that’s worth less than it was when the debt was initiated.

There’s a political concern embedded in the debasement trade, too.

“The shifting trade war, the U.S. government shutdown and the president’s use of the Justice Department to target his domestic foes have underscored worries about political dysfunction and unpredictability,” according to recent reporting — not in a progressive publication, but from Bloomberg News. And Wall Street listens to Bloomberg’s financial news.

Nothing Is Certain—But Death, Taxes, and Inflation

Real estate is called a hedge against inflation. As inflation keeps rising, buyers who get a fixed-rate mortgage can avoid mortgage interest rate hikes, plus stop having to pay rent to live in a home. In most cases, those rents go up.

And yet there’s another way to look at the half-filled glass. Inflation, including the rise in home values, is actually about our weakening buying power. Sure, the home we bought has a much higher dollar value than it had a decade ago when we first bought it. That’s home appreciation, and every deed holder loves to see it.

But here’s the rub: If we go look for a new place to live, it’s going to cost us a fortune. Yes, our current home equity will give us a boost in the market, but the fact remains. A lot of people are stuck and can’t sell because housing prices went up so high, and then mortgage rates went up, too. Taken together, these factors stress out both first-time buyers and current deed holders, as home prices have skyrocketed.

More to the point, the value of our dollars has fallen. Your home didn’t increase its intrinsic value by 20% or more over the past few  years. Simply, people just have to spend that much more from their wallets to buy your home now.

And although the value of a deed does appreciate over time, that value depends on the homeowner maintaining the home, paying insurance and property taxes, and other expenses such as closing costs and interest on a home loan. Granted, the interest can be subject to a tax break when the deed holder files an annual return.

One Way to Beat Debasement: Earn Rental Income

Of course, we can be owners and also pull in rent as income. This is why Warren Buffett has long considered real estate a “productive” asset.

Renting out living space is not for everyone. A home is first and foremost a shelter, a space to live. But those who rent out a home, or part of a home, or even an accessory dwelling unit in the backyard, can generate income. In most areas, the deed holder is free to adjust the rent periodically to keep up with inflation.

And this is the one way to hedge against the devaluation of the dollar. Hold productive assets which bring a cash flow, and adapt to the monetary reality. The dollars that make up rental income are less valuable, which is the reason for rents going up.

Rents will keep going up, unless capped, because real estate prices just will not settle down any time soon. Not without deliberate help from state governments, for example. Normally, high loan rates put a damper on demand, but today, no such luck. According to industry figures, the nation could use somewhere near 5 million more homes to meet our population’s needs. And that supply-demand ratio is keeping home prices high.  

Does This Change What We Think About Acquiring a Deed?

The idea here is to explore a term that’s in vogue among economists, related to real estate and other “hard assets.” It’s not to change anyone’s mind about the importance of holding a deed — that concept remains intact!

Still, it’s meaningful to understand what a “housing boom” really is. Home prices may keep going up, but that corresponds to our drooping dollar power. As real estate price tags swell, the typical person is, in fact, losing the spending power to transfer one deed for another.

We can’t shield our money from this “debasement.” But we can stop thinking inflation means growth. To quote Judge Judy: “Don’t pee on my leg and tell me it’s raining.”

That said, holding real estate matters. Because property values tend to rise with inflation, while income from employment simply isn’t moving to match this rise. And therefore, ultimately, buying a home is helpful in providing financial safety and generational wealth.