As Housing goes so goes the Economy…….Not so much anymore….Why?

Deflation, Inflation OR Stagflation

To understand the next phase of housing, we must first evaluate our current economic conditions and consider the long term ramifications for the housing industry. Housing continues to be upside down and until this industry moves forward on the right track, the economy will continue to suffer.

The following chart illustrates the percentage of car and house sales as components of the GDP after each of the past recessions.  BLS is projecting the percentage to be less in 2014 than reported after the great recession was “officially” over. How does that translate into anything positive? 

I thought it would be appropriate to define our current economic conditions. Please let me know if you agree with my assessment. This is important if you intend on planning for the future since the economy has momentum in one direction and it will take years to change the trend.

Definition of 'Deflation'

Source: Investopedia – underlined definitions

 A general decline in prices, often caused by a reduction in the supply of money or credit

            The Fed has injected over $3 trillion in government bonds into the economy

The supply of money injected into the economy since the recession is staggering.

Deflation can be caused also by a decrease in government, personal or investment spending

            At the end of FY 2014 the gross US federal government debt is estimated to be $17.9 trillion,    according to the FY15 Federal Budget.   

            At the end of FY 2014 the state government debt in the United States is expected to be

            $1.21 trillion

            At the end of FY 2014 the local government debt in the United States is expected to be

            $1.92 trillion

Government debt continues to rise and the Federal Government has been spending more money than it takes in for years

Deflation has the side effect of increased unemployment 

The unemployment rate is artificially low but the spending and the money supply aspects of the definition clearly illustrate we are not in a deflationary period.

Definition of 'Inflation'

Source: Investopedia– underlined definitions

The rate at which the general level of prices for goods and services is rising

            Inflation Rate Goal of the Federal Reserve:         2%

            April     2014                 1.95%

                        2013                 1.06%

                        2012                 2.30%

                        2011                 3.16%

                        2010                 2.02%  

As you may know, the inflation rate does not include food and energy prices. It seems to me that prices are spiraling upwards.

Subsequently, purchasing power is falling

            Consumer spending is an indication of how consumers use their income to buy goods and services. Consumer spending drives 70% of the U.S. economy. 

Consumer Price Index - The Consumer Price Index (CPI) is a measure of the average change in price over time in a fixed market basket of goods and services bought by consumers for day-to-day living

Inflation depends on how much money the government prints

            The Fed has injected over $3,000,000,000,000 ( trillion ) in government bonds into the economy

As the supply of money goes up, inflation follows. 

Interest rates remain sensitive to inflation, so low inflation contributes to low interest rates.

The rate for 30-year mortgages -- now around 4.3% -- will likewise edge up slowly to 4.7% by the end of 2014, follow the Treasury bond rate in its jump up in early 2015, and end 2015 around 5½%. This is low by historical standards, Source: Kiplinger

We have low interest rates, money supply is being reduced inflation seems to be in check (if you believe the data). It clearly illustrates we are not in an inflationary period.

Definition of 'Stagflation'

Stagflation is an economic phenomenon marked by slow economic growth and rising prices.

 In the 1970s, rising inflation and slumping employment put a damper on economic growth.

Source: Investopedia – underlined definitions

Slow economic growth

GDP                 2011     1.8

                        2012     2.8

                        2013     1.3

1^st QT                2014     0.0 estimate

 

Economic growth has been slow at best.

Rising prices

In 1970, inflation was 5.5%.         By 1974, 12.2% and in        1979 at 13.3%

2014 – Inflation is under control or is it?

Unemployment increased even as inflation continued to rise

2014 - Unemployment rate is lower than a year ago or is it?

Housing – Next Phase

Home prices will continue to rise

Cost of materials and labor will also continue to rise

Growth in the housing sector is slow at best with a large pent-up demand not being satisfied

In the construction industry, unemployment remains high

It would seem to me that the housing sector is in a period of stagflation. Everything is upside down and the economy is being split apart. Housing may stay in stagflation for decades.