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Post Covid Wealth

The government stimulus efforts and shutdown of the economy has had a tremendous impact on the price of goods and services. The effect of this has often been underestimated, especially for those with larger bank deposits and bond holders. 

The largest price increases can be seen in the housing market, with many homes going up 30% or more since Covid began until now. This kind of price increase is something worth examining closer and future options should be considered to improve your financial well being.

Deeper Dive into the Real World

The people that have large or larger checking and saving account balances have been hit the hardest. Even though fuel prices have increased, these are often volatile to begin with and are not that great of a measure of inflation.

I personally believe that local and national housing price movements can be a fairly accurate way of estimating what has happened to the purchasing power of the dollar. Let's take a look at some examples.

This house has gone from $300k to approximately $550k in a time span of 6 years. That's an increase of 85%! Almost double in price!. Averaged out, that's slightly over 10% yearly inflation for the past six years!. 

Here is another example:

This home is in the same area and has increased over 81% in the past six years!. From $292k when it was sold on 5/19/2017 to recently when it was sold for $530k on 05/04/2023. 

In addition, the average 30-year mortgage rate is significantly higher now, and so are the property taxes because of higher assessments.

Compared to the Great Recession

Just from these two examples we can see that the purchasing power of the dollar has taken a big hit. Americans who had savings before Covid and who held these in savings/checking or even bonds, have had their wealth significantly reduced. 

In the Great Recession we had higher unemployment, job losses, and home foreclosures. The average home dropped in price as well, but it’s very important to note that a decline in home value is not the same as losing money. If you dont sell the home, you have an unrealized loss, and by waiting out most of the homes recovered to their pre 2008 price.

The big difference with the post Covid effect is that many households suffered realized losses to their wealth. The inflation actually eroded the wealth of the average household.

This was more profound for those that did not have a personal home to hedge with, which had increased in price. The people with just savings or other low yielding investments such as bonds suffered as each dollar bought less and less in the past three years.

Preparing for the Future

In light of this history, and the present situation, it's important to understand the effects of inflation on our dollars. We can minimize these future events by keeping just enough in our checking accounts for paying the necessary bills. 

Any additional funds we have should be ideally placed in a stock index fund. I believe stocks will give the best chance of maintaining and even increasing your purchasing power in the long run. 

Most companies will raise the price on the goods or services they sell if inflation were to increase again, and this will protect the companies earnings. This is even more true for value stocks, which tend to on average to perform better in a high inflation environment. 

To Sum It Up

Even though inflation will most likely come down in the next few years to the normal average of 2%, I am almost positive we will have higher than normal inflation in the future. Any future stimulus efforts have a high probability of increasing the money supply at a faster rate than overall economic growth, leading to a cycle of inflation. 

And with record government debt, there is a higher chance of the United States government deflating the dollar further to reduce the “real” dollar amount of debt held. In summary, I believe in not keeping more than necessary in low interest yielding accounts like checking or savings and being more careful with investing in government or corporate bonds.