Let’s pursue an economic analysis based on Gavekal’s Four Quadrants discussed earlier this week.
Today, we are clearly in an inflationary boom. Almost every piece of economic data, every commodity price, and market behavior points to this. It’s unusual because capitalism usually drives deflation.
Most businesspeople, entrepreneurs, and real estate agents wake up thinking, “How can I produce more with less?” Capitalism always aims to produce more with fewer resources as can be seen by builder products in today’s housing market. For the past 30 or 40 years, many of us have lived in a deflationary world. In such a world, when interest rates rise, as they are today, you worry if these rates will stop economic growth.
But in an inflationary world, rising interest rates rarely stop a booming market because nominal growth tends to rise as fast as interest rates. For example, if interest rates go from 0% to 5% but nominal growth goes from 2% to 7%, companies and households can still pay off their debt without a bust.
In inflationary cycles like the 1970s or 2006-2008, you need a bigger shock to the economy. Most households and businesses can take one hit, like higher interest rates, and still keep going.
Right now, the Fed’s tightening hasn’t had much effect because nominal growth is still rising.
Why? First, there’s a labor shortage, raising wages for low-end workers who tend to spend most of their earnings, boosting demand. Second, there’s a boom in emerging markets, not just in China, which raises global demand for energy and natural resources.
Others may be concerned more about a deflationary bust. Those who are included in this group will think inflation is cyclical and has now faded. That cyclical inflation is now back in its pre-COVID range.
For real estate agents, housing is the biggest challenge to overcome inflation. However, it is hard to measure housing inflation.
Here in the Raleigh area, we have seen more consistency in our housing market than other areas of the country are facing. Cities like Jacksonville, Florida, Austin, Texas and larger metros like San Francisco are seeing home values drop. Which one should we place the emphasis on for statistical data?
Should we base inflation on the average monthly mortgage payment? Those payments have gone up significantly in the last two years not only because of interest rates more than doubling since March 2022, but also because home insurance and other costs have increased.
Those rises in cost trigger higher rents for owners of investment property.
Which one should be focused upon to come up with accurate information?
The good news for those in Raleigh, Durham and the surrounding areas is that the central North Carolina market has continued to rise in value in five of the last six recessions. The only losses in value were around 12%-15% from 2006-2010. However, values had recovered by 2013 and home values have jumped since then, visible in the most recent tax revaluations put out by local counties in 2024.
On top of that, the job market here in the Research Triangle Park is still strong and will continue to be for the foreseeable future.
*Photo produced by artificial intelligence.