High Inflation Sucks. High Home Prices Don’t?

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  • High Inflation Sucks. High Home Prices Don’t?

For about two years (mid 2020 to mid 2022), home prices went absolutely bonkers! Some people who bought homes before the pandemic saw their home values increase by 40%…in 2 years! That’s nuts.

Suddenly, everyone wanted to be a homeowner. Many people thought buying a home was like buying a hot stock, and expected double digit returns like they were buying Bitcoin or the S&P 500.

You see when the pandemic hit, unemployment skyrocketed, and many people tragically lost their lives. There was no way the government was going to let the US economy fail as well so the government did everything it could to make sure that didn’t happen.

The government gave money directly to people, entrepreneurs, small businesses, big businesses, banks, well trained animals…you name it…everyone got some money!!

Didn’t get any money? Ok, we’ll make it easy to borrow it. Interest rates were subsequently dropped to damn near zero so that you could borrow a ton of money. If the consumer has money and can borrow even more money, they will spend it and boost the economy.

That’s exactly what happened. People bought cars, homes, vacations, you name it…Home prices went through the roof! We heard about bidding wars left and right. Who cares if I have to pay $100K over asking price if I have a 3% interest rate on my mortgage, right?

Median Home Price Growth 2019-2024.

Then, around June 2022, the Federal Reserve realized it had gone overboard and inflation was out of control, driving asset prices (homes, stocks, crypto) way too high. The party had to stop and someone had to turn the lights on. They raised interest rates faster than at any point in human history.

These two charts look very similar huh?

Suddenly, it cost twice as much to buy the same home…that had already gone up 30% in price. The housing market ground to a halt as affordability became an issue. Ever since then, inflation has come down slowly from the record 9% levels to around 3.4%.

Home prices are still appreciating (increasing), but at a much slower pace, a more normal pace, around 4-5%, not 20% annually. And now you’re caught up. That’s where we are now.

Where do we go from here?

The April 2024 Consumer Price Index (CPI) report came out and showed that although inflation has been decreasing, the biggest contributor to it NOT decreasing as fast as it could be…is shelter/housing costs.

Shelter costs are a big component of the CPI data because, obviously, shelter (your rent/mortgage) is one of the biggest expenses in a person’s life. Rent usually makes up 20-40% of a person’s monthly income.

The problem is that shelter costs are up 5.5%. The latest housing data reports that nationwide home prices are also up 5.5%. What a coincidence?

If nationwide home prices were to increase only 2% year over year then guess what? Inflation would likely only be around 2% as well.

pic of cpi components

By the way, we’re making some assumptions to simplify things, but all other components of the CPI report that the Fed keeps track of such as oil prices, car prices, insurance, food prices etc..would have to continue to decline as well.

If Jerome Powell and the rest of the Federal Reserve Board saw that inflation got all the way down to 2%, guess what? They would lower the Federal funds rate, which would lower the yield on 10yr treasuries, which would then lower interest rates.

Not the crazy 3-4% interest rates we saw a couple of years ago (those aren’t coming back anytime soon), more like 5.5-6.5% interest rates.

That’s great, right? Homes will be more affordable because your monthly mortgage will be lower.

But here’s the problem. Lower inflation would also likely lead to lower home price growth, maybe only around 2-3%. Guess what? That. Is. Normal.

But some people may not see it that way. They have been inundated with social media posts talmbout how they should invest in a home like they invest in a stock.

No, buying property is a way to get rich, wealthy even…very, very slowly. Home values appreciate a little every year, and you pay down your mortgage balance a little more every year. Then you wake up 10 years later (not 2 years later) and realize that you’re worth a lot more money than you used to be.

Don’t Fall for the BS

At some point, inflation may fall below 3%, and who knows, maybe even 2%. If it does, it will be because a large component of the CPI data, shelter/housing costs, will have decreased. This means that some homeowners will see the value of their homes slightly decrease, some home prices will remain flat, and some will only increase by 2-4%. This is normal.

You will see doom and gloom headlines saying that the housing market is going to crash! Run for your lives! The great depression is coming! Don’t buy a house now, wait until prices crash even more!

99% of this is bullsh!t.

The only thing you should pay attention to is supply and demand. That’s it. Are there a bunch of new construction homes being built in that particular neighborhood (location)? Be careful, there may be more supply than demand.

Is it impossible to build new homes in that school district or in that neighborhood (location) in NYC because there’s no land left? Limited supply means prices will probably go up.

Of course there are other factors like school district, proximity to traffic or a park, square footage etc…but just remember the golden rule of real estate…location, location, location.

A home is a LONG term investment in yourself and for future generations. Who cares about the price next year? What will the price be in 5-10 years? We have yet to meet someone who regretted buying a home 5 years ago.

Ignore the noise, keep your eyes on the prize.

As always, let us know if you need a good realtor or a good loan officer.