Inflation has taken its toll on consumer prices and apartment materials are no different. While government officials and others insist peaks are “transient,” John Burns Real Estate Consulting sees that as the code for “don’t worry” and exposes the case for transient vs persistent.
‘Transient’ inflation could mean one of three scenarios:
- Prices go up and down
- Prices rise and stay where they are
- Prices rise and continue to rise, but more slowly
A sharp and permanent increase in house prices and costs is certainly worth worrying about, suggest John Burns Real Estate Consulting authors Alex Thomas and Eaint Zaw.
“Inflation fears are prompting consumers to block payments as soon as possible, especially if they are confident they can stay and make payments for the long term,” they write.
The Federal Reserve and other members who support a transitional condition “are correct as some of the drivers of high headline inflation in recent months will resolve in the short to medium term (six to 18 months),” Thomas and Zaw write.
The “goods” are hit by a double shock
The goods suffered two simultaneous shocks to its system created by COVID and associated stimuli.
COVID-related restrictions have made goods more difficult to manufacture and transport. This resulted in supply shortages which allowed manufacturers to raise prices.
However, supply eventually catches up with demand and manufacturers reach full production. The most common example is the volatility of lumber futures. After skyrocketing over the summer, they fell dramatically and wiped out their 2021 gains.
Loaded consumer pocket books
Three rounds of government stimulus over the past two years have inflated consumer bank accounts and boosted demand (and therefore prices) for goods and services throughout the economy. The demand will eventually decrease as the savings are spent.
“Consumers, businesses and those who expect inflation to be ‘persistent’ are making inflation expectations part of today’s decisions,” the report said.
Of the 210 clients surveyed by John Burns Real Estate Consulting last month, 70% believe the recent soaring price appreciation will not cause current prices to drop over the next five years. Thomas and Zaw expect wages to rise as the supply of workers shrinks due to massive retirements.
“An influx of money into the economy has created purchasing power that will last for years,” write Thomas and Zaw.
Banks have $ 3.9 trillion in reserves (2x before COVID) and “the speed of money is at an all-time low; money has to be spent to appear as inflation, and we have yet to feel the full impact on prices.
What consumers expect
Consumers are actually forecasting double-digit increases in rents, gasoline and medical care over the next year.
“Demand and supply will eventually meet, which means inflation will be technically transient,” the authors write. “However, substantial wage increases are already underway, which will increase the cost of many products permanently.”
Plan the following until the next recession, says the report from John Burns Consulting:
Lower material costs: The prices of commodities that are less dependent on labor will eventually decline as supply catches up with demand.
Rising labor costs: The prices of labor-intensive goods are likely to rise and remain high until the next recession.
Increasing income: Some increases in rent and house prices will be permanent since homebuyers will have more money, but that doesn’t mean house prices can go over the moon.
Questionable land prices: Although land is a commodity, residential house prices are based on the following formula: estimated future income – estimated future costs – normal profit margin = land value.
With incomes likely to rise in areas where they haven’t already grown too much, and costs likely to fall, land values should fare well in most areas.