What, me worry? You remember Alfred E. Newman, cover boy for Mad Magazine way back in the day, and his famous saying, “What, me worry?” As a homeowner or prospective buyer, should you be worried about inflation? My personal belief is that we shouldn’t worry too much about things that are beyond our control. Macro-economic factors effecting the market are WAY out of our control, unless you are on the Federal Reserve Board setting monetary policy. It’s still good to keep up on economic news and consider how the economy can affect our lives. The Wall Street Journal recently posted an article about our lofty inflation rates, based on the September Consumer Price Index. The author pointed out that the housing market is ‘cooling’.
The WSJ author was misleading in his characterization of the housing market. The fact is, the market had been historically hot, and it couldn’t stay that way forever. This is the time of year for things to typically slow a bit anyway, and the market has gone from white hot to merely red hot. It’s still hot! Looking at inventory and demand, we still have an inequitable situation that’s skewed towards the sellers. The market ought to become more balanced at some point anyway.
The thing about inflation and inflationary cycles is that the more prices rise, the more they need to keep rising as every sector of the economy plays catchup. Wages in particular need to go up, especially in a tight labor market where employers are having challenges attracting and retaining talent. Follow the logic here: as prices go up, wages go up, and as wages go up people can afford more, which stokes demand and leads to further price increases. The Labor Department indicated that wages rose 4.6% from September last year. That’s not as much as inflation at 5.4%, but it’s not far off either. The core price index, a more stable subset of the consumer price index, was up less than wages at 4%.
A big driver behind inflation is the interest rate. As rates go up, the price of money increases and the economy slows which brings prices in check. If they go up too much, the economy is at recessionary risk. If they don’t go up enough, prices keep going up. It’s a tightrope walk for sure, tweaking the numbers like dials on an old radio. You turn the dial too much to one side of the other and all you get is static, but when you hit the right frequency, the sound is clear.
Don’t be surprised when you see interest rates go up. I hate to break the news to you but they can’t stay under 3% forever. The good news is that we live in Marin County, which is an area in very high demand. Bay Area employers, particularly in the technology sector, are throwing money at people to work for them. Those people with all that money are still out there and they need places to live. Unfortunately, there is a chronic housing shortage. This supply problem is not going away in the near future.
If you are thinking about buying a house, and you can afford it, don’t lose sight of the fact that now is still a great time to buy with interest rates under 3%. If you are thinking of selling in the final quarter of 2021 or in 2022, don’t lose any sleep. Your house is likely your most valuable asset and it has increased in value tremendously over the past decade. Its value won’t drop overnight, if at all anytime soon.