Inflation forecasts — like everything else — have been too conservative

GENERAL COMMENTARY

If there's been one consistent theme during the recovery it has been analysts, strategists, economists, and forecasters of all stripes have been incorrect in judging the resilience of the U.S. economy.

The May Luxury Real Estate Report has almost all Luxury Market in Real Estate in the U.S. in a "Seller's Market". (see link at end of report).  The days on the market are short and the buyers outnumber the sellers.

There are many reasons for these circumstances of events. 

  1. The Pandemic has allowed many to work from home, thus saving time and money.  
  2. The IPO market has been HOT!  
  3. New money creates pent up demand to overflow into buyer demand. 
  4. Supply in homes for sale is limited for a number of reasons:  a.Sellers do not want to venture out for fear they and their home will become infected.  b. Higher future property taxes. c. Capital gains taxes.  d. Questions of where to move.  e. Establishing new relationships with professionals.
  5. The California Department of Real Estate has not made that easy either.  Buyer's must confirm intention of purchase before they could view the property. 
  6. Thus we have a limited amount of sellers and an over abundance of buyers.

Forces that will affect asset prices are interest rates and cost of goods.

At present we have an increase in inflation rates to 4.2%.  This is well over the 2% Federal Reserve target.  

The question that will affect the markets is will the recent reported inflation rate force the FED to change?  Will the FED begin tightening on rates.  The answer here may be the recent decision of the FED to sell their inventory of Corporate Bonds and Money Market ETF's.

Selling by the FED takes money out of circulation which will lead to an increase in supply forcing higher interest rates to gather buyers. 

Adding to inflation is the Cost of Goods.  The lack of employees returning to work has led to limited supplies from Wood, Cattle and various other commodities.  A principal reason for the increase in prices is because workers who process the commodities would prefer to stay home and collect unemployment and U.S. Government subsidies than return to work.  Thus creating limited supplies and higher product prices. 

The FED's answer to the current rate of inflation is that it will only be temporary.  

If September 2021 ends the extra $300 in unemployment benefits, will it lead to a mass drop in unemployment and prices.  If that is correct the FED will begin selling their bond inventory before they raise rates. The  FED will be behind the curve.  The market place will raise rates as corporate borrowers go to the marketplace borrowing in anticipation of higher future rates.

Janet Yellen, former FED chair and Secretary of the Treasury, has stated higher interest rates are good for the economy.

LOCAL REAL ESTATE MARKET

Buyers should expect to compete.  Sellers should expect short days on the market and competitive interest in their property.

Cost conscious Buyers should begin to look outside the Peninsula to the East Bay and beyond.  Prices are beginning to escalate in the East Bay and areas around Sacramento where home sizes are larger and prices are substantially less than here in the Peninsula.  The change in the ability to work from home is benefiting those who can move.  The benefit is larger and less costly homes with just as good as, and better than, current Peninsula schools, no homeless communities and safer neighborhoods.

For the empty nesters it is more a function of where to move before a decision to sell.  The move outside of California becomes more controversial as statistics show Californians are more inclined to move within California than the are to move outside of California.  

With each Broker Price opinion I am asked to perform I find that prices are declining, ever so slightly.  In Portola Valley and Emerald Hills the declines have been 4% on an annual basis.  When I look at the Loomis and Granite Bay area the forecast is +12%.  Still the 12% forecast of price increases are well below the comparative home in the Peninsula.

May Luxury Home Market Report

Fears of Foreclosure are Wanning

Over 14% of Renters Are Still Behind as Eviction Moratorium Nears Its End

Thank you

Gary McKae,  01452438, eXp Realty of California  01878277


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