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Inflation and economic indicators to spot housing market shifts

Why you should watch these economic indicators that may impact housing over the next few months.

House prices are going up at double-digit rates with no end in sight. Construction materials and a wide variety of commodities, such as metals, farm products and finished goods are rising faster than any time in recent memory. The Producer Price Index, a precursor to the Consumer Price Index was up 4.2% over the 12 months ending March 31, the highest it has risen since 2011. What are some economic indicators to look at to spot a potential housing bubble?

Inflation is here

Inflation is already here, and signs are that it may rise more in the next few months. We know that both the Secretary of the Treasury (Janet Yellen) and the Chairman of the Federal Reserve Board (Jerome Powell) have said recently reported that inflation is likely to rise in the near term but neither think it will be a problem for our economy. However, I recall that former Chairmen of the Federal Reserve and former Treasury Secretaries missed the stock market crash of 1999-2000 and the economic crash of 2007-2009. 

Two things to consider

Historically, we should take note of two economic indicators. First is that governments that impinge on the supply of things while fueling the demand side usually drive up inflation. That is what the federal administration is doing. New restrictions on the supply side, such as closing down pipelines (federal level) and slowing approval of new construction (state and local level), while printing trillions of dollars to stimulate the economy is what is happening right now. 

Second, once inflation gets going, the Federal Reserve historically resorts to raising interest rates to cool off the economy. That is the great danger of the next few months and years — once the inflation genie is out of the bottle, the Fed will have to raise rates to calm down inflation.  Or, try to calm inflation fears. On the one hand, rising rates will cool off the housing market. It will also cool off the stock and equity markets. 

If the Fed, as they’ve done in years past, waits too long to cool things off, they may also pause too long to reduce rates to stimulate the economy. The other challenge is that a rise in rates is one thing when you owe $10 trillion at 3%; it’s another thing when you owe $30 trillion and each 1% point difference in interest costs absorbs an additional $300 billion in Federal expenses. Think about that one for a minute. Yet, if they avoid raising rates, it may lead to an economy where inflation is rampant.

For all housing professionals, this bears close watching over the next few months.

Steve Murray is a senior advisor for RealTrends and a partner in RTC Consulting based in Colorado.

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