Inflation and Home Prices: Is the Romance Over?
January 7, 2010 in 2010 Predictions, Best Of The Storm, Fresh Perspectives by Andrew Jeffery
This post first appeared in the SPECIAL EDITION: Cirios Trends: A Decade in Flux
A cursory look at the long term trends for inflation and home prices reveal strikingly similar patterns. Until, that is, right around 2003 (see dotted line below).
In the wake of the short recession caused by the dot-com bust and September 11th terrorist attacks, then-Federal Reserve Chairman Alan Greenspan aggressively lowered interest rates to spur economic growth. Leaving rates at historic lows for several years encouraged active borrowing, helping to bring the US economy out of its tailspin.
Greenspan critics now wonder, at what cost?
As homeowners, real estate speculators, investment bankers, mortgage brokers, real estate agents, appraisers and credit rating companies (among others) rushed to grab their piece of property values, the historic relationship between moderate inflation and steadily rising home prices broke down. Home prices leapt, while inflation continued its casual march upward.
Then, around the beginning of 2007 (the “peak” of our 6-month moving average dataset), the relationship flipped inverse (see arrow above). Rising prices as measured by the CPI faced off with tumbling home prices, feeding the feverish macroeconomic debate of inflationists vs. deflationists.
Now, as what feels like the entirety of the financial world awaits the inevitable inflation that “must” come after trillions upon trillions of dollars in economic stimulus, we hope the following few pages shed some light on what we can expect if it turns out the majority (in this case, the inflationists) prove to be correct. Since policy-makers’ key tool to fight inflation is higher interest rates, and higher interest rates translate into more expensive mortgages, future inflation has serious implications for real estate markets around the country.
Related posts:
- Home Prices vs. Mortgage Rates: Let’s Dance Explore the relationship at the heart of the debate over the housing market’s future....
- Do High Mortgage Rates Kill Home Prices? Find out what’s in store if rates rise from historic lows....
- SPECIAL EDITION: Cirios Trends — A Decade in Flux SPECIAL EDITION: A Decade in Flux...
- Inflation: What is it Good For? Philosophy aside, inflation is a lot more than just rising prices....
- Home Prices: A Much Needed Breather After a historic rise, an equally historic fall....
