The old saying went, “a little inflation is good for real estate.” The idea was that a small dose of inflation each year lifted home values and home equity and made owning—and selling—homes more attractive.
Of course, conventional wisdom goes, there’s no serious inflation in the economy right now. Well, that depends on what you consider serious! Have you tried to finance a child’s college education recently, or bought a tank of gasoline, or gone to a doctor or hospital, or bought coffee or food recently? It is amazing how economists are able to take items like these out of core inflation, and then pronounce that ones left over, which haven’t inflated, means there’s no inflation in the economy at large. It is an example of why economics is known as the dismal science.
Certainly, there isn’t much inflation in the housing sector currently (except in a few scattered prospering markets around the country). There is pervasive deflation, or stasis at levels of 30% of price reduction. And there is the possibility (look at those dismal new home sales numbers) that low demand will cause a double dip in housing prices. (Another old saying goes that housing leads the general economy into and out of recessions, and if that’s the case again, watch out for a national double dip!)
We have just been through a disaster caused, in part, by too much housing inflation, and no one wants to see another housing bubble anytime soon. And we’re currently in a trough of not enough housing inflation. How can it be gotten just right?
Supply and demand would be the answer most people give, unless you can set interest rates yourself. And nobody can—except the Federal Reserve.
Granted the Fed doesn’t set the Treasury rates that mortgages are priced off of. But it sets discount and prime rates and its loosening or tightening influences everything.
It may not be time for the Fed to raise interest rates, especially if the economy wobbles towards a double dip. But the governors should at least be thinking about it.
Of course no one wants to see mortgage rates at 20% as they were in the early 1980s. That choked off demand by making a mortgage unaffordable, even if Fed overall rate policy did manage to squeeze inflation out and started us on a long period of low rates.
Currently we remain at the “free money” end of the spectrum, and if no one wants to be doing much borrowing and lending these days, it pays to remember that easy money was one of the causes of the economy’s spectacular crackup.
That brings us back to where we started—a little inflation is good for real estate. Keeping it to just a little bit—that’s another matter.
