Inflation in the US

Understanding Inflation and the Housing Market in the US

Inflation in the US has had a significant impact on various sectors, including the housing market. Reflecting on recent history, many remember a time when gas prices were around $2 per gallon. This seems like a distant memory compared to the price spikes experienced in recent years. For instance, gas prices hit $3.776 per gallon in 2014, surpassing the 2021 average of $3.491. It wasn’t until March 2022 that new all-time highs were reached, highlighting how our memory often focuses on recent events—a phenomenon known as attention bias or the “what have you done for me lately” effect.

Mortgage Rates and Housing Market Trends

In January 2022, the average mortgage rate was around 3%, but it has since climbed to approximately 6%, still considered historically low. Recent reports indicate that 61% of home sellers in Boise, Idaho have reduced their asking prices. However, the extent of these reductions is not always clear, with some reductions potentially as small as $1 or as significant as $10,000. Surprisingly, Boise’s home prices have risen by 60% since March 2020, compared to a 40% increase nationwide, according to CNBC. This discrepancy illustrates how news headlines often focus on dramatic shifts without providing a complete picture.

The Surge in Home Buying and Investor Activity

In 2021, the housing market saw a surge in both domestic and international cash buyers. South Florida, in particular, attracted wealthy buyers from countries like Colombia, Brazil, and Mexico, creating intense competition for available homes. As a result, many properties were sold above asking prices.

Investors accounted for about 18% of all mortgage purchases in early 2022, up from a historical average of 11%. This surge in investment activity contributed to rising costs for second homes and investment properties, as noted in the “FHFA Announces Targeted Increases to Enterprise Pricing Framework,” which took effect on April 1, 2022. This increase in costs does not account for the impact of large corporations purchasing homes with cash.

Current Market Conditions and Opportunities

With the competition in the housing market beginning to ease, now may be an opportune time to enter the market despite higher rates and prices. Potential homebuyers, who were previously discouraged by repeated rejections, might find more opportunities now that some sellers are more willing to negotiate.

Inventory and Supply

The inventory of available homes has increased by 28% from last year, which has alleviated some of the bidding wars. For instance, South Florida’s inventory, which was around 28,000 units in 2019, dropped to approximately 8,000 units in 2022. Even with a threefold increase in inventory, the supply remains relatively low.

Demand and Market Balance

According to CNBC, 27% of homeowners are looking to sell, while 36% want to buy in the next year, making it one of the highest percentages on record. Despite the current supply of only 2.6 months, compared to the ideal 6-month supply, the market remains tilted toward sellers. The number of offers on properties has decreased from around 20 to 1-5, reflecting a shift in the market dynamics.

New home sales saw a 14% increase prior to the last eight Junes, and a record 42% of survey respondents view homeownership as a great investment. However, newly built homes are available at a 7-month supply, exceeding the average of 4-6 months.

The Impact of Inflation

Reflecting on historical commodity prices, such as gold, which has risen from $35.10 per ounce in 1964 to $1,706.50 today, highlights the effect of inflation on investments. Similarly, the average home price has surged from $18,500 in 1964 to $428,700 today, illustrating the impact of inflation on real estate.

Conclusion

Inflation and market trends can create confusion and make it challenging to interpret news headlines. Often, these headlines focus on sensational details that may not reflect the complete picture. To navigate these complexities, it’s beneficial to stay informed, think critically, and approach the market with a long-term perspective, much like Warren Buffett advises. Remember, while you might not always predict market fluctuations, staying engaged and informed can help you avoid missing out on opportunities.