High inflation and a disappointing economic growth report – followed by a sudden drop in stocks late last month – made for a familiar economic mix.
These conditions were characteristic of the 1970s, when inflation was high, leading the Federal Reserve to raise interest rates. The central bank’s measures to control inflation have driven up borrowing costs for property developers and ultimately reduced the purchasing power of buyers.
As a result, the real estate market stagnated and the decade itself became synonymous with stagflation, a business cycle characterized by high inflation, tepid growth and low employment, leading to a stagnant economy.
While these trends may seem familiar, today’s real estate market is resilient. Not to mention, job growth is solid.
The major problem today: the lack of stocks.
“One could argue that there is weakness in the housing market right now, caused by a supply-side shock,” Mark Fleming, chief economist at First American, told Yahoo Finance. “In other words, a restriction in the supply of a good, which causes inflation. … But I wouldn’t say we’re in stagflation,” Fleming noted. “The problem is not low demand, it’s low supply.”
Claudia Sahm, former Fed economist and chief economist at New Century Advisors, LLC, agrees.
“This is not stagflation,” Sahm said. “The GDP numbers look weak, but consumer spending is only growing. … But we face an ongoing battle with inflation, and people call inflation all sorts of things.”
Learn more: Mortgage rates exceed 7%: is it a good time to buy a house?
A housing supply deficit of 6.5 million homes
At its core, inflation is the result of an imbalance between supply and demand.
In the real estate market, low inventory was a problem that existed before the pandemic due to more than a decade of underbuilding. When interest rates fell to record lows, buyers who flooded the market found themselves faced with scarce inventory.
That has led to bidding wars, frenzied buyers forgoing inspections to close deals faster and home prices soaring to record levels in some hot markets.
“We had weaknesses before the pandemic, and the pandemic just blew things up,” Sahm said. “That was absolutely the case for housing.”
As homeowners hunkered down and focused on refinancing at lower rates during the pandemic, homebuilders saw an opportunity to increase the nation’s housing supply.
As of March, 477,000 new single-family homes were available for purchase in various stages of development, compared to 970,000 existing single-family homes.
Overall, new construction accounted for a third of the inventory on the market that month, well above the 12% average, according to data provided by the National Association of Home Builders (NAHB).
However, even after all of this, the overall build-up stock remains small.
Even though builders are responsible for much of the inventory currently available, undersupply is also caused by homeowners who are “locked in” – sitting on ultra-low rates that they don’t want to give up.
The United States is still 6.5 million short of single-family homes compared to the number of families starting new homes, Realtor.com found.
“In the 2010s, after all the home builders went bankrupt when the housing bubble burst, they only built big houses because only the rich could buy back at the time,” said Robert Frick, business economist at Navy Federal Credit Union. “So not only did we end up with fewer houses, but also a shortage of smaller houses where people can start.”
What changed ? “Builders are now building smaller homes,” Frick said.
In some ways, this imbalance between supply and demand is reflected in the Consumer Price Index, an inflation indicator that shows the prices of everyday goods, gasoline and food, accommodation and rent.
Although housing accounts for a third of the overall CPI index, it is only a snapshot that fails to paint a picture of what homebuyers are experiencing today.
“Housing and housing inflation is the only part of the CPI that doesn’t tell us where we are right now,” Sahm said. “In terms of housing costs going up or down, it tells us that story over time, and we’ve had some big fluctuations.”
While, yes, housing inflation is still higher than expected, it has also come a long way over the past couple of months.
House prices rose 5.7% over the past year, according to the latest CPI, but were down from their peak of 8% in March 2023.
According to Sahm, housing sector inflation has not reflected inventory freshly entering the market, including new construction underway. As this supply enters the market, housing inflation is expected to continue to slow this year.
“You cannot buy what is not for sale”
Fears of stagflation stem from a slower pace of sales in recent months, some housing experts say.
For example, the share of homes already owned fell just over 4% in March, according to the National Association of Realtors (NAR). Year over year, sales were down almost 4%.
Although the number of existing homes on the market shows signs of improvement, it remains near its historic low.
Yet despite the slowdown in sales, demand is still there, even amid higher prices and interest rates.
“Buyers, even first-time home buyers, are finding a way to buy and afford something, even at a 7% mortgage rate,” Fleming said.
The drag on the market is inventory, particularly on the existing home side of the market.
The inventory of unsold existing homes increased nearly 5% from the previous month to 1.11 million in March. According to the NAR, this equates to just over 3 months of supply at current sales rates. Yet this is well short of the six months needed for a balanced market.
“You can’t buy what’s not for sale,” Fleming said.
In April, the national median listing price for active listings was $425,000, up just over 14% from a year ago, according to a separate Realtor.com study, and rising just over 32% from April 2020 levels. Overall, active listings are down 60% compared to 2020.
“Prices remain rigid simply because of lack of inventory. We’re still a long way from normalized inventory levels,” Melissa Cohn, vice president at William Raveis Mortgage, told Yahoo Finance. “In the meantime, there are still enough buyers who are keeping prices higher despite high interest rates.”
Labor markets are growing
Unlike the stagflation era of the 1970s, which had high unemployment rates coupled with high inflation, this is not the case today.
The US labor market remained stable in April, although fewer jobs were created than expected. The Bureau of Labor Statistics also recorded a slowdown in wage growth and a slight increase in the unemployment rate.
In total, some 175,000 new jobs were created in the U.S. economy and the unemployment rate reached 3.9% last month, according to the Bureau of Labor Statistics. At the same time, the average hourly wage increased by 0.2% compared to the previous month and by 3.9% annually. This figure is slightly lower than economists’ forecasts, which predicted an annual increase of 4%.
“Spending is good, income is good, labor markets are growing at a good pace. That means more wages, more income, more expenses,” Frick said. “I have no concerns about the economy.”
In contrast, in the 1970s, unemployment increased significantly while inflation was high. Between 1970 and 1974, the average unemployment rate was 5.4%, according to the BLS.
The latest jobs report, however, improved expectations that the Federal Reserve would lower its benchmark interest rates at some point this year — even if inflation remains above its 2% target. This is a positive for hopeful buyers who want a break from high borrowing costs.
“The sad situation is the economy is doing well, but rates and mortgage rates are high,” Frick said. “So we have this weird situation where the economy is running on, say, seven cylinders, but the eighth cylinder – housing – is misfiring like crazy.”
Gabriella Cruz Martinez is a personal finance and housing reporter at Yahoo Finance. Follow her on @__gabriellacruz.
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