Stagflation In Real Estate
For those who do not know, inflation has been a problem for U.S. consumers over the past year. However, a term that is being tossed around more now than before is that of stagflation. If you want an example of what stagflation is, look at the real estate market. High inflation with stagnant output often times leads to this phenomenon of stagflation. This era of stagflation in real estate proves to be a challenge for buyers, builders, consumers, and the Federal Reserves. Here is why we are seeing stagflation in real estate.
Why There Is Stagflation In Real Estate
While homebuilders are consistently starting more builds to fit demand, there is a nationwide problem. That problem is supply. Not only is the supply of homes too low for the demand from buyers, but builders also are having supply problems. Whether there is a shortage of supplies or dramatic price increases that make materials harder to obtain, builders are struggling with keeping up. Stagflation is indeed a headache for builders that are trying to ramp up supply to capitalize on historic demand. However, where one party struggles, another one usually shine. This is the case for sellers and existing home owners. They have an asset that is scarce, hard to come by, and hard to build.
With home prices in the nation reaching a historical price increase of 18.8%, it is clear to see how sellers are still winning. According to the Case-Shiller U.S. National Home Price Index, this is the largest single-year increase in home prices. However, the real residential fixed investment fell in consecutive quarters in 2021, and was unchanged in the 4th quarter of the same year. This shows that homebuilders are trying to build new homes, but are struggling to keep up. Homebuilders are trying to build more, but are encountering some of the most challenging and unforgiving supply chain issues ever. The increase in production has not been enough to match demand, and is lower than expected due to these issues. On a seasonality adjusted scale, new home builds of single-family homes has actually remained unchanged since 2018. While most people might have trouble remembering the housing market just 4 years ago, that is where the seller’s market started.
How To Solve The Stagflation Problem
While inflation is sticky and hard to get rid of, stagflation has a few ways to be addressed. The most logical way of helping stagflation in real estate is to sure up the supply chains in the industry. This means improving supply of basic home building materials, such as cabinets, garage doors, and windows. From personal experience, it took over 12 months to have a custom arch-way window made and installed. However, fixing supply, especially of goods made in America, is a hard task to solve in the short term. Sure, over time, investment in U.S. manufacturing will help supply, but that is a years-game. The second, and most likely way, is to restrict credit to Americans or raise mortgage rates to reduce home-buyer demand. This is the likely course of action, as we have seen interest rates actually impacting demand in 2022.
However, that is a problem too, because of the same reason. Supply. The inventory of new and existing homes in America is at a record low. And according to Bill McBride, we are now in a sweet-spot of homebuying. This is because of Millennials, a large demographic, finally getting into the housing market. Millennials look to bring demand for years, exuberating the need for homes. Another issue with raising rates is the overall economy. Raising rates enough to decrease demand will likely throw the entire U.S. economy into a full-blown recession. The Federal Reserve is willing to raise rates to cool inflation, but not high enough to cool the housing market. Jerome Powell knows that raising interest rates is a thin-line ordeal, and could cause economic downturns. The housing market is arguably the most robust and important industry to the U.S. economy.
The Costs Of Stagflation In Real Estate
Taking out a loan on a home at 5%, compared to 2.75% a year prior could be problematic. With inflation already squeezing most Americans, obtaining a home might not be the smartest idea to do until inflation subsides. However, the benefit of owning that home is the equity and fixed payment when everything else gets more expensive. This is why real estate is a hedge to inflation. Check the housing market for a leading indicator for inflation and stagflation.