It’s true that I’ve never agreed with the National Association of REALTOR’S Chief Economist Lawrence Yun. It’s nothing personal; but it’s everything professional. I just don’t understand why today’s economists can’t figure out why inflation is bad. Of all of the complexities of economics, inflation is pretty much the easiest to understand. We’re not trying to figure out the reasons for irrational exuberance or call the bottom on the stock market. Inflation is simply the slow and steady erosion of a currency’s value. And with a devalued currency comes devalued everything. Including housing. Yet for some reason, NAR’s chief money-thinker is still wishy-washy on whether inflation – triggered by 3 trillion stimulus dollars – would be good or bad for home ownership. I guess it depends on whether you want to turn American into a banana republic or not.
Just how NAR can be confused on an issue like this is beyond me:
If there is inflation, property owners would be clear winners, as the value of real tangible assets like real estate will rise. That’s why property values rose in tandem with consumer price inflation in the 1970s and early 1980s.
But buyers will lose. High inflation automatically brings high interest rates. Lenders will charge a higher rate to compensate for the loss in purchasing power. Nobody wins if households can’t afford the cost of money to buy.
Some readers might say Yun is just hedging his bets, (kind of like GM?). That’s too bad, because the REALTORS’ chief economist shouldn’t offer an iota of contradiction on this issue. Perhaps it’s just par for the course. Remember, many REALTORS once (and still) advocated for “more affordable housing” and we ended up with Fannie Mae and Freddie Mac.
Look how well that worked out.
Yet REALTORS can’t be capricious when it comes to inflation. There can be no waffling when someone – perhaps the media? – is sure to parse such statements for dramatic effect. If anyone should know, it ought to be REALTORS: There’s no way property owners would be “clear winners” if inflation soars.
Consumers are already a little suspicious about REALTORS abilities to “price assets right” in the market. Ask anyone who trusted an agent a few years ago when they said, “Don’t worry! It will keep going up!” When it comes to inflation, let’s not be seen as simply switching which foot we are chewing.
Nobody wins with rising inflation. Period. Even if Yun tries to equivocate the words value with cost. The cost of tangible assets like real estate will rise with inflation; their value will not. Costs represent the amount of dollars needed to purchase the item. Value reflects an asset’s ability to store and protect those dollars; and perhaps even grow them over time. Rising housing prices due to inflation means the purchasing power of buyers will be falling. So how can we possibly consider sellers potential winners in that scenario?
Isn’t that exactly what we have today – where sellers are clearly not winning?
If prices rise while the number of financially able buyers falls, both ends of the market are moving away from each other. Sellers will be stuck with worth-less assets. Buyers will simply continue to rent (where monthly prices are stable and predictable for at least the lease period). Inflation means buyers will need multiple-more dollars with each passing month to purchase the same homes. That’s called another asset crisis. Owners won’t “realize” a gain on any inflated-values unless they actually sell their homes. Not likely when spending power decreases and higher loan interest rates stall lending. At the same time, rising inflation will erode the homeowner’s own purchasing power, through higher food, fuel and living costs.
The only good news is for politicians: Rising inflation will cause property taxes to go up. In the minds of local politicians, homeowner’s assets will be rising. What better time for another property tax re-assessment, to make up for falling employment taxes. Finally, let’s not fool ourselves into thinking any o bank is going to let homeowners use inflated homes-equity as an ATM machine ever again.
There is no reason to hedge our bets. Artificially rising asset prices due to monetary deflation spells disaster. Put more simply, if your house is worth more because the dollar in your pocket is worth less, you are not a clear winner.
And it’s about time NAR and one million REALTORS started saying so, without equivocation.
Currently, the United States official inflation rate is nominally around 3% (we won’t even discuss the Consumer Price Index). To make the point that higher inflation is bad for homeowners, let’s list a few countries where rising annual inflation has been carefully studied for years.
- Zimbabwe 470%
- Burma 39.5%
- Venezuela 20.7%
- Tajikistan 20%
- Iran 17%
- Slovenia 5.6%
- Lebanon 5.6%
- Colombia 5.5%
- East Timor 5.4%
- Sudan 5.3%
- Panama 5.1%
See anywhere you would consider inflation a “winning” situation for property owners? No, I didn’t think so.
Don’t think it can’t happen in the United States, either. In 2008, the United States inflation rate topped 5% in at least 3 months; and was above 4.9% in one other. That puts us closer to the bottom of this list, but what company we would keep. Last year’s spikes also occurred before the Federal Reserve printed trillions of dollars, deflating the currency. At one point, Treasuries traded in negative interest rates; which means the Fed had to pay people to buy American dollars.
Wonder if the Fed will pay people to buy American homes?
Advocates of property ownership – aka, REALTORS – need a clear perspective on inflation. They can’t glibly say “it’s good for some and bad for others” out of both sides of their mouth.To quote another economist, Ludwig von Mises, the dangers of inflation cannot be underestimated:
Inflation is essentially anti-democratic… [it] is not an act of God, inflation is not a catastrophe of the elements or a disease… Inflation is a policy… credit expansion and inflationary increase of the quantity of money frustrate the common man’s attempts to save and to accumulate reserves for less propitious days.
Sounds very much like where we are today, even before any predicted spikes in inflation. Savings and reserves have already been decimated, after of a decade of lending-based inflation. The average home in America is worth almost $60,000 less than it was three years ago. And that’s the figure for owned properties; not foreclosures.
To even hint that monetary inflation might make homeowners winners is to ignore the trouble we’re already in. Any inflation is destructive, even our current 3%. REALTORS need to be straightforward with consumers about this fact. They need to understand that inflation destroys savings, and most Americans’ savings is stored in their homes. The continued sidelining of buyers who are still waiting for the “other shoe” to drop indicates that the consumer understands inflation’s dangers.
It’s time for REALTORS to understand it, too. Otherwise we’ll all be losers.