Stagflation VS Inflation
By James Vaughn
The terms “Stagflation” and “Inflation” are all abuzz these days. But what do they really mean? How do they affect main street consumers and those looking to buy or sell a home?
Most people understand inflation as “my dollar buys less than it used to.” This is generally correct- think about how a new home could be purchased decades ago for $10,000, and now that amount will not even buy a new car. How times have changed!
But this only sees inflation in its simplest form, and does not consider the factors that underpin inflation year over year. The inflation rate is calculated using both the Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCE). Both indexes consider what consumers are spending for certain goods; the CPI looks at feedback from consumers themselves, while the PCE considers feedback from businesses about consumer spending. The “basket of goods” contains various things that may not track evenly with each other. For example, the price of certain electronics may actually go down over time as the technology becomes more prevalent, while food and cars trend steadily upward. Homes trend upward over long periods of time, but do experience recessionary corrections.
Inflation is a near constant presence in the economy. Stagflation, on the other hand, represents a rare and transitory phenomenon that has, until now, occurred only once in the 1970s. Stagflation in the 1970s defied typical market trends by exhibiting inflation and recessionary stagnation (higher unemployment, local GDP growth) at the same time. Normally, recessions accompany lower inflation, while a strong economy causes higher inflation. However, in the 1970s, a period of strong and steady economic growth following the end of WWII ended with heightened international instability, increased domestic government intervention in local economies, and higher fed-driven interest rates intended to curb inflation (sound familiar?)
So how do homebuyers and sellers navigate heightened inflation, and possible stagflation? First, know what you can count on. The Fed has said it is committed to curbing inflation. That means the Fed will continue to use higher interest rates, its most powerful tool, to curb inflation until it falls back to an acceptable level. The Fed has a strong track record of doing what it said it would do. Second, know where you stand. If you are a buyer, and know that you will be able to stay in a home long term, then concerns about a home price recession in the short term should not worry you too much; real estate has a strong track record of growth over time. However, if your timeframe to sell is shorter term, such as 2-3 years, then you may want to give serious consideration to your decision to buy at the present time. Finally, think creatively about your market and given properties that you may buy or sell. Just because interest rates have gone up does not necessarily mean it is a bad time to buy, especially if you can get a good deal on a property from a motivated seller. Likewise, sellers experiencing FOMO because they worry they have missed the boat on the hot seller’s market should remember that the conditions of the last few years represented an anomaly, not the norm.
Whether you are a home buyer, seller, or simply considering your next move, The Sands & Associates team is always ready to help determine the best time to buy or sell and navigate a complex transaction.