DEflation?
When something that cost $100 in 2021 costs $110 in 2022 because the costs to make it, ship it and sell it have risen too, you might call that 10% inflation. However, when that $110 item does not sell and is on sale for 30% off, it will sell for around $77......that is called DEflation.... Now imagine that product priced at $110 has a seller who recognizes that there are many more buyers for his product, and some are offering to pay over $110, he decides to price it at $120......just because, why not? And it sells! What happens when it does not sell? Chances are he will adjust the price lower till someone sees value and buys it. When it sells for $90 - not a bad price - that would equate to 25% DEflation. All markets everywhere will always be governed by supply and demand. Always.
Yesterday I scanned retailers Bergdorf Goodman, J Crew, The Gap, Target, Walmart, Saks Fifth Avenue, Bluefly, Kohls, Pottery Barn, etc and not one of them did NOT boldly offer big discounts, anywhere from 30 - 70%......a possible early indicator of high retail inventory over-supply .....and pricing DE-flation? The increase of inventories in some of the best-managed companies is high. Consumers are railing against sharply higher prices. And they bought and own lots already. Consumer sentiment in the highest income groups is lower now than the lowest income groups. Michael (The Big Short) Burry speaks of the BULLWHIP EFFECT..... a situation in which product demand forecasts do not align with actual sales, leading to massive volatility in inventory levels and other supply chain disruptions. Burry asserts that retailers like Target will have to lower prices to get rid of their excess products, thereby lowering inflation that has surged to its highest level in decades.....which may lead the Fed to LOWER rates to avert recession.
Inflation spiked upward after the Spanish Flu’s third and final wave came to an end. .....then after spiking, inflation plunged and by mid-1921 there was double-digit DEFLATION, when the CPI was 15.8% lower than where it stood in mid-1920......history has a way of repeating itself, and this pandemic was fueled by excessive stimulus......and greed......and supply chain disruptions in global markets.......and a war.....and an energy crisis.....and political in-fighting when the important issue of our time are largely playing second fiddle......
Yes, some home prices - especially exaggerated, irrationally aspirational prices - are certain to come down in areas, more notably in areas where price escalations in the past two years were at extremes. They already have. Some areas will see much smaller price drops. Others will see slowing price escalation, but still escalate. And some home prices may actually continue to soar......especially home rental prices as more people form families and either cannot afford to buy or choose to 'wait and see'..... EVERYTHING we see over the next few months and years will be driven by supply and demand. Few people have the ability to ignore affordability considerations.
For those seeking a window into the longer term - always wise with real estate - it's possible that now as some builders pull back on construction due to higher borrowing costs - after the dust settles and pricing continues its upward trajectory, pricing could spiral upward further and faster as this reduced building could further exacerbate the UNDER-supply of homes in the US. Which makes a solid case for buying now at higher rates....with the prospect of refinancing later when rates come down. We shall see.