A slow economic growth and increasing inflation combined is known as stagflation. This is happening already in the U.S. Housing market, and other parts of the world, where the inability to provide the resources needed to continue production is becoming more common and is sending prices through the roof.
Homebuilders are trying to build more homes, but the housing supply chain still is unable able to increase production to match the increasing demand. Completions of single-family homes have been unchanged since August 2018, considering the changes during the same period of time over the last few years.
Homebuilders and Homebuyers are directly being affected by stagflation, but it seems to benefit the large number of existing homeowners, who can drive prices up, because the demand just keeps getting higher but the supply has barely increased, if at all.
U.S. home prices rose by 18.8% in 2021, yet real residential fixed investment fell in the second and third quarter of 2021 and barely changed in the fourth quarter.
In order to address this stagflation, we can take 2 approaches. The first one and most convenient would be to improve the supply of resources like garage doors, cabinets and windows that are holding back the homebuilding market but it is something politicians do not have the tools to improve, at least not as soon as needed.
The second approach would be to restrict credit or raise mortgage rates high enough to reduce home-buying demand. While we are in the home-buying sweet spot, from an age perspective, for the large millennial generation, this should ensure strong demographic demand for the next several years, but the inventory of new and existing homes for sale is at a record low at the moment. The biggest challenge is raising interest rates high enough to put a dent in the housing market but without throwing the rest of the U.S. economy into recession.
House pricing is no taken to account when it comes to inflation however, the higher the buying prices a driven, the higher the rents will rise and that will create an impact in the overall economic situation. 65% of American households own their homes, and of course they will see a positive impact as it is home equity what determines the middle-class wealth. Right now that wealth is estimated to have risen around $1 trillion every quarter consecutively for the last 3 quarters. To provide some perspective, the highest number in the middle of the housing boom in the 2000’s was around $450 billion per quarter.
That accelerated increment will eventually translate into inflation and rise higher prices on every other aspect of the economy. For now the options are limited in order to combat stagflation, as both options have high risks of backfiring and affecting other areas that may not have been anticipated.