Today we will probably hear about record-high inflation numbers for the month of March....approaching high's seen last in 1981. Inflation has always existed, although at significantly lower levels for the past few decades. And inflation has always been a good reason to own real estate. Twenty years ago a Manhattan apartment we just sold for around $1.8 million could be purchased for around $350,000.00....
At one moment many were speculating that the inflation surge would be temporary as a massive, unprecedented, unprepared-for resurgence in demand outstripped supply causing pricing to surge in almost all areas of the economy. They speculated that once production had been ramped up, prices would moderate and even come down. But that has not happened and many now speculate that higher inflation is here to stay for extended periods of time. Here are some of the reasons why:
- Too much money at very low interest rates has been circulated into the economy. Government spending is at an all time high, massively fueled by COVID (up 47% in 2020 alone!). US Government spending rose 27% in the 5 years prior to 2020. US national debt to GDP rose 23% in 2020. The upside is the wages for the lowest earners has risen notably, but the buying-power of their money has diminished with rising inflation. Lots of money circulating has fueled an unprecedented consumer buying spree....that has caused demand - and prices - to surge.
- Supply chain disruptions persist. Mexico has experienced pork disruptions due to disease. China has new COVID lockdowns. Some severe global weather has shut down production in areas around the globe.
- Even though many immigrants - legal and illegal - are entering the US daily, this does not seem to be filling the economy's need for 'more affordable' labor. The increase in the immigrant population between January 2020, before Covid-19 hit, and January 2022 was nearly 2.2 million, or 1.1 million a year, much more than the 770,000 average annual increase in the decade before the pandemic. Many parts of the economy still are experiencing labor shortages, causing wages to rise. There are about 1.7 job openings for each person looking for work. Many skilled workers left the economy during COVID. An aging population (65-plus) has risen to close to 17% of the US population, up from 13% about a decade ago.
- Greenflation: our desire for cleaner energy - and government policies to accelerate this - has caused cuts in production of fossil fuels and nuclear energy, causing energy prices to rise. The initial investments for green energy are high. New infrastructure is very expensive and takes a long time to build! OPEC ramped up oil production over the past decade to suppress shale oil production by keeping oil prices lower and then cut production dramatically during COVID.....its just now approaching its past production levels. (32 million BPD in April 2020, and now still below 30 million BPD). It's impossible to motivate local US oil producers to produce more oil and gas when they're being told the world wants them out of business.....
- The Ukraine-Russia War has taken a tough situation and made it notably worse cutting supplies of oil, gas, grains, etc that have had ripple effects globally. The recently accelerated energy price spikes are directly associated with this war......a form of WAR-flation, and hopefully temporary, although unlikely if certain supply sources need to be replaced.
- So much of the 'stuff' we buy is made in other parts of the world where production costs are significantly lower. As the 'made locally' trend surges as a response to globalization, maybe consumers didn't factor in just how much more expensive the end product has to be if you pay your staff a living wage locally.... If we want to cut back imported stuff, we have to be prepared to pay more for what we buy. Globalization fueled lower prices and deflation on many goods.
- Even locally made 'stuff' contains foreign made components. Just one missing part slows production and in a high demand environment swimming with capital, someone will pay more, thereby raising prices.
- In all times of trouble there will always be vultures who take advantage of the situation: I've personally witnessed extraordinary 'because we can' pricing, or price-gouging that further raises prices for no other reason than.....because they can. If someone is willing to pay the price, why not, right? We all pay for that....till the demand dries up.
- Tariffs on imports are well intentioned mechanisms to encourage production of certain things locally. But when a 17.9% tariff is applied to lumber imports from Canada - when the US cannot meet lumber demand - all lumber costs more. Building a home costs more. The consumer pays more. Inflation rises. (Lumber tariffs are being dropped to 11.64% in August 2022) Just a few weeks ago a 25% tariff in UK steel was removed.
A house that sold for $500,000 in January, 2020 is worth $600,000 (and more) just two years later today in many, many parts of the US (and world). While these massive value escalations are unsustainable forever, the fact that most believe elevated inflation is here to stay for years to come should leave most homeowners feeling quite secure that one of their biggest investments is indeed in real estate. Yes, prices (and price escalations) may ....MAY....cut back here and there...but when replacement costs keep rising in an environment that is still grossly under-supplied, I would not bet on that happening!