What does stagflation for the housing industry mean? – Orange County Register

What exactly is stagflation and how does it affect housing and mortgage rates?

Stagflation is a combination of high inflation (inflation is a general increase in prices creating a reduction in purchasing power), an increase in unemployment and slow economic growth, no economic growth or negative economic growth.

By the way, stagflation is different from a recession. The definition of a recession is two consecutive quarters of the negative gross domestic product.

How can we find ourselves in stagflation?

In a word, prices. President Donald Trump’s prices finally create a tax on consumer goods and services, because these additional tasks will be transmitted to the consumer. We also have a trade warning war with China. These events can put the United States in the stagflation trajectory.

“The United States has not yet been forced to solve the huge inflation problem. Our national debt is 36 billions of dollars, or 720% of income, “said Michael Pento, president and founder of Pento Portfolio Strategies. “These rates have been the highest increase in tax since 1981.”

“Prices are increasing and wages increase during stagflation. Then you have a salary spiral, prices,” said Ted Tozer, former president of Ginnie Mae under President Barack Obama. “I hope they will go back from these prices. Consumers are injured, whatever happens. ”

In addition to everything, the dollar falls against other currencies. A low dollar can add to stagflation pressures. It takes more dollars to buy foreign goods and services when the dollar is lower. This increases costs, which causes even higher retail prices.

So what happens to mortgage rates during stagflation?

Mortgage rates are increasing. Lenders demand a higher yield, because the dollars today will be worth less in the future.

Obviously, if the mortgage rates increase, the purchasing power is reduced because the payments of the house become more expensive compared to a stable monthly income.

What happens to the prices of houses?

The prices of houses could increase considerably, as they did during periods of stagflation in the 1970s and 1980s. Building materials and land is more expensive.

Will we see opportunities?

There could be real good deals. It’s sad to say, but those who lose their jobs can be forced to sell their homes.

What should a consumer do?

First and foremost, buy a house or rental property only if you are financially safe. There is always a chance that the prices of houses do not soar, like the 1970s and 80s when interest rates were extremely high.

Also make sure to protect yourself.

If you have a house now and you are nervous about the financial future – as you may lose your job – it is best to prepare in advance.

Get a home credit line, in case of an emergency. Look for the loan from your retirement fund to continue. If possible, think of ways to hang on to your home. You may be able to borrow money from a family member.

What is the remedy for stagnation?

The president of the Fed, Jerome Powell, is in a difficult position. It can further increase short -term interest rates to slow the economy, bringing prices together and stifling inflation. But if he does, unemployment will increase even more.

If Powell reduces short -term interest rates, hiring should increase, reducing unemployment. If he does it, he also pours petrol over the fire of inflation.

As reflection says, it is more important to reduce inflation than to reduce unemployment.

It is difficult to predict whether the rates increase a little or much if the economy gets the stagflation bug. In the 1970s and 1980s, our economy had a bad dose of stagflation with interest rates on the moon.

According to Freddie Mac data, the average fixed mortgage of 30 years exceeded 18.44% on November 6, 1981. Since then, rates have mainly dropped until the status of 9.93% a figure is mainly permanently on November 23, 1990.

The prices reached the bottom at 2.65% on January 7, 2021. Since then, they have largely rose. Today, the current rate of Freddie Mac is 6.83%.

Freddie Mac Rate News

The fixed rate of 30 years was on average 6.83%, 21 base points greater than last week. The fixed rate at 15 years was on average 6.03%, also 21 base points higher than last week.