Stagflation is
a rare economic condition of persistent inflation but low or stagnant consumer
demand due to several factors, such as a high unemployment rate. It is an unusual
situation because inflation often occurs due to high demand. Stagflation is a
condition of slow or stagnant economic growth, but prices continue rising
without visible or valid reasons for the inflation. However, other factors can
come into play that makes prices rise. A factor that may help explain such an
unusual condition is the rare occurrence of disruptions in intricate supply
chains. The housing market requires a lot of building materials, but materials
may not come as ordered by homebuilders. Supply disruptions cause scarcities in
lumber, roofing materials, paint, pipes, etc. Stagflation is a boon to current
homeowners who see increases in their home values. The housing market is tight
due to long pent-up demand from Covid.
Stagflation is a bane to homebuilders who cannot finish housing projects on time. It is also a curse to all potential homebuyers who have difficulty buying a new home due to rising prices. The Federal Reserve Board (the Fed) is in a grave dilemma. It is like being caught between the devil and the deep blue sea. It is an old saying indicating an awkward situation. The Fed has to choose between two equally unpleasant and unpalatable choices. It can raise bank interest rates to contain rising inflation and hope not to trigger a recession. Or the Fed can opt not to raise interest rates but end up hurting everybody, especially consumers. In a period of stagflation, the courses of action and monetary tools available to the Fed are limited. A policy increasing interest rates may work or may not work. There are no guarantees at all. The Fed is between two equally unpleasant courses of action for which it may get the blame.
Given the issues with stagflation and the markets tanking in recent weeks. I predict that the housing market will take a hit as well as their prices will just be too high for the average consumer. We are in a rough time where prices are rising quickly while people are starting to save more due to their cost of living lowering.
ReplyDeleteStagflation last occurred in the United States in the 1970s and early 1980s. In that time frame, oil prices skyrocketed to around $100. We have to keep in mind that 100 dollars in 1970 costed more than 100 cents today. Also, the inflation rate reached double-digits.
ReplyDeleteIf/When the housing market corrects I hope the effects of the correcting doesn't hurt the economy like the housing market crash in 2008 did.
ReplyDeleteThe Fed finally increased interest rates this week by 0.25% and inflation is predicted to come down to ideal levels by the end of the year.
ReplyDeleteIf the market corrects and the housing bubble bursts, it is going to have a profound impact on the economy, especially for homebuilders, contractors, and real estate investors. In 2020, the housing market made up around 17% of the U.S. GDP
ReplyDeleteSince the Fed has just recently increased interest rates, it will be interesting to see how this increase affects the entire economy as a whole, as well as the housing market. I think that eventually the housing market is going to have to go back to a more stable position, but with what is currently going on in the world, I'm not sure how long that is going to take.
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