The 10-Year Bet

Many of the transactions I have written this year involve seller financing.  Many have involved downpayments ranging from 5%-10% of the purchase price.  However, none of them have involved a balloon payment of less than 10 years.  Why?

With credit shrinking at breakneck speed and unemployment preparing to stay at structurally high levels, price pressure on real estate should stay soft for sometime into the future.  In fact, we may not see prices increase again for another 5-6 years or so in Utah in any meaningful way.

There is a debate being waged today between inflationists and deflationists.  Marc Faber gave an interview to Bloomberg regarding this which I found very interesting.  He sees things as a mixed bag...which I think is the prudent view given that we are in uncharted economic territory. However, when asked about inflation down the road Marc said this:

"In ten years time, in my opinion, about 50% of tax revenue will be used just to cover interest on government debt...and that is unsustainable.  Then you are really forced to print money"

Printing money at the levels Marc is speaking about ultimately creates inflation.  Gold, stocks, consumer goods, and real estate all react to the printing of money.  Hence, our fortuitous 10-year bet on balloon payments.  In ten year, banks will likely be shoving loans out the door (yet at higher interest rates) just to keep up with inflation.  Also, by that time, equity positions will be strong enough in the properties that the owners can justify selling them or refinancing.

What interesting times we live in.  Click here for another interesting yet apocolyptic article with Marc's insights.  My advise after reading it?  Buy real estate as a hedge against economic and political insanity.  American property owners have a tendency to weather economic and political convolutions better than most. (Just ask the survivors of the French and Bolshevik Revolutions.)