Mild inflation is a good thing because it means the economy is growing. Rapid inflation suppresses real estate and the economy and is not a good thing. The fed’s target for inflation has been around 2 percent the past several years.

Currently we are experiencing rapid inflation. Many US employees woke up to a 3% rise in wages on January 1st, and they are excited about that.  The sad thing is, prices are rising at 7% overall, and some things are much worse than that. Inflation is like a hidden tax in that consumers just lost 7% purchasing power on their money.

Everything is going up in price, from food, gas, clothing, cars, construction, etc. If you have a rise in wages, you are further behind because of inflation. Seniors will be hit the hardest because they live off social security and investments. They are not even enjoying the 3% raise workers are.

If you own a house, you might think that’s good because rising home prices will help protect you.  That may seem true right now, but it’s what comes next that might alarm you.

To combat inflation the Fed must slow things down.  There are too many dollars chasing too few goods and services in the economy. The Fed will be forced to halt stimulus. In addition, the Fed is ending bond purchases to take money supply out of the market. When that is completed in March, they will begin the process of raising interest rates.

You may have noticed rates have already risen. This is because the Fed has already begun tapering of the bond purchases. Many are now expecting 4 rate hikes this year instead of 3, and the rate hikes might need to be bigger than .25% The last time we saw inflation at 7% was back in 1982. To combat inflation the Fed raised interest rates in chunks of .5% to1%

Inflation Suppresses Real Estate and the Economy
10 Year Treasury Yield

Mortgage rates are closely tied to the 10 Year Treasury Note. As of today’s writing, the 10-year treasury note stands at 1.716%. Lenders use this as a baseline and add a percentage to determine today’s 30-year mortgage rate.

Rising interest rates temper consumer spending. If there is less stimulus and borrowing costs rise, consumers must spend less. When consumers spend less, businesses make less, and consumers have less in their pockets. Taxes may rise to pay for last year’s spending spree by the government which will serve as a double whammy to consumer pocketbooks. We will have an increased tax bill plus the hidden inflation tax leaving you with less money to spend. This is exactly what the government wants. They need to slow down the too many dollars chasing too few products and services. The economy feels like it is doing well now, but the bad medicine is coming.

There are other ways to tackle inflation. This government has not done that, and they will not use those tools, so unfortunately monetary policy will be the only tool they will use, and only reluctantly. Had they enacted the other tools or acted sooner we would not be in this mess, but now here we are.

It will not do any good to complain or worry about it. The bad medicine is coming. The fed may try to sweeten the medicine with more stimulus, but that is like giving pain pills to an addict. It is what helped cause inflation in the first place.

For every 1% rise in interest rates buyers lose 11% purchasing power. As the economy slows you eventually run out of people who can afford to pay rising prices. Back in the 80’s we had over 18% interest rates, and selling real estate was tough. Back then, home sellers had to pay thousands of dollars in buyer’s points just so buyer could get a loan that was legal. The US has usury rates which were the maximum rates allowed by law a lender could charge.  Because market rates were higher than usury rates, buyers had to pay points to buy-down the rate.  Buyers did not always have the money to buy-down the rate, so sellers had to do it to unload their property.  It was simply a cost of doing business in inflationary times.

Rising rates and a slowing economy will eventually catch up with the housing market. Using monetary policy alone is the toughest way to fight inflation and takes the longest. Rising rates are a lagging component of slowing the economy.  Monetarily, the sooner the fed tapers the balance sheet and raises the rate the sooner we will slow the economy.  Doing it slowly can lead to a recession.

Of course, if the government did this the correct way we could have avoided much of the pain that will come from doing it only monetarily. This administration caused inflation, so asking them to correct and reverse course does not seem likely.

Some people believe the economy will slow in 2nd half of 2022. Whatever happens, rates will rise, and the economy will slow for rates to be held in check.

To find out your home’s current value, go to or call Brett or Sande Ellis 239-310-6500 We can help you sell at today’s high prices. If you are a buyer, call us at 239-489-4042. Let’s get you in before rates go up.

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