Economists' Outlook

Housing stats and analysis from NAR's research experts.

Inflation: the Short and Long-Run Scenarios

  • Broad inflation still looks tame, up less than 2 percent from one year ago, but could easily rise faster.  The annualized inflation in April was already speeding at a higher 2.4 percent rate (that is if price gain in April was to persist similarly for the next 12 months) and then accelerated even faster to 3.2 percent in May.
  • A higher inflation rate will mean higher mortgage rates.  Lenders need to charge a bit more since the returned money will have lost some purchasing power.  When the inflation rate was in the double-digits during the 1970s, the mortgage rates were also in the double-digits.
  • One key reason for inflationary pressure, though still mild, is that housing costs are rising and rising.  Apartment rents are rising at 4 percent rates according to a private sector source (REIS).  But this data is not counted in the official government statistics, which captures rent differently and from more regions.  According to the government, official rents are rising at 3.1 percent; though smaller compared to the private sector data it still marks the fastest rent increase in nearly 6 years.
  •  Home prices have been rising even faster, with a 5 percent gain according to NAR and 11 percent gain according to Case-Shiller home price index.  Home prices, however, do not get counted in the inflation data.  Rather, a murky homeowner equivalence rent is counted.  This data is fuzzy because it tries to estimate what a homeowner would pay in rent if the current lived-in home was a rental home.   Irrespective, this ambiguously imprecise measurement of homeowner equivalency rent rose 2.6 percent, the highest increase in nearly 6 years.
  • NAR expects CPI inflation to be 2.5 percent in 2014 and then pick up to 3.5 percent in 2015.  Home prices are expected to rise by 6 percent in 2014 and then slow to 5 percent in 2015.
  • Over the long-haul, some prices will rise faster than others.  Typically, prices of electronic gadgets like television fall over time.  Someone with a fixed-rate mortgage will pay the same amount for the rest of the lifespan of the loan, and not a cent more.  On the other hand, college tuition, if the past is a guide, could lead to not only a bankruptcy of the student but potentially also of the parents.  College tuitions have risen by 200 percent in the past 20 years.  Wages grew by 82 percent over the same period.
  • It is worth reflecting that one of the most creative times of human minds in human history occurred during the Renaissance, particularly from Florence, Italy.  Yet the most inventive minds of that time never went to college.  They were simply the Renaissance Men and Women.

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