Inflation rates have recently gotten a lot of attention. A 4.2% inflation rate reported in April will definitely generate some discussion. And those discussions have raised concerns about the health of our overall economy and home affordability, specifically.
What does that 4.2% number really mean, though? If we look at the table below provided by USInflationCalulator.com, we can see the inflation rate by calendar year back to 2000. In 2017, the twelve-month inflation rate was 2.1%. In 2018 it was 1.9%. 2019 was 2.3%. and 2020 was 1.4%.
So, a 4.2% number means that we, as consumers, paid about 4.2% more for certain goods in April 2021 than we did for those same goods in May of 2020. That 4.2% number includes Food (which went up 2.4% over the past 12 months), Energy (which increased 25.1%), and essentially everything else (which are services and commodities that went up 3.0%).
Did you notice that big increase in Energy? That’s what’s driving the reported inflation number. Since inflation is essentially driven by increased economic activity, that must mean that we’re buying more energy in April 2021 than we did in May 2020.
Energy primarily means gasoline, which is almost 50% higher over the past year. That number makes sense to all of us. We weren’t travelling in May of 2020, since we were all in the middle of pandemic lockdowns. OPEC slashed production and refineries shut down. Now, in April of 2021 we can travel again, many are commuting back to the office and visiting with families, OPEC hasn’t increased production to meet demand, Texas refineries slowed production due to an historically harsh winter, over a dozen US refineries were shuttered in 2020 due to the pandemic, and now many of us have stimulus checks in our pockets which we’re using to catch up on missed vacations.
Since this inflation measurement is compared to last year, we’re really looking at an artificially low base-line number. Yes, we’d still be dealing with that Texas winter and production problems will need to be resolved before prices fall. But we’re comparing current spending to last year when we were all sitting at home watching Tiger King.
It’ll take a few more months to work through these challenges, but the Federal Reserve still expects inflation for the year to be about 2.2%. That’s slightly above the 1.8% historic average but a far cry from April’s 4.2%.
What does this mean for housing?
Firstly, housing has intrinsic value. Whether we own our home, rent, or live in an Airstream we all need a place to live. Even in the aftermath of the Great Recession people were still buying and selling houses.
Secondly, unless sustained inflation drives up mortgage lending rates, we’ll still see strong demand for homes. However, we’re all familiar with price increases for lumber, drywall, siding, copper, and steel. If we also consider the chance that mortgage interest rates could rise in the next few years, it creates pressure to buy now. We can get more for our money now versus later.
As hot as housing is right now, we’re not seeing any signs that this market will cool off anytime soon. Interest rates are still historically low. Housing demand is strong across the nation. By our own internal metrics, the Boise metro area has 22 days of housing supply on the market. The Tri-Cities area has 12 days of supply. Which means prices will continue to increase as motivated buyers compete for limited inventory.
Construction materials costs are expected to rise through the end of 2021. Inflation could be a concern for the next few months. Mortgage rates are still low. Some industry experts don’t expect housing supply to meet demand until the end of the 2020’s. Unless you’re willing to sit out of the housing market and wait for several years, it’s probably better to buy sooner rather than later.