In March of this year, a U.S. senator from Arkansas, John Boozman, sounded the warning bells about inflation. He called the issue a “national emergency” and, at the time, demanded that the Biden administration start “prioritizing driving down costs.”
Just eight months earlier, a former Federal Reserve president, Narayana Kocherlakota, had called inflation a “short-term blip” that was “a small price to pay for the fact that we are providing more employment to so many people [during the pandemic].” At that time, Kocherlakota did warn that the American people could cause the blip to become something much bigger if they “began to believe that high inflation will be a persistent, rather than transitory, phenomenon.” He warned that buyers would begin acting on that assumption and “feeding a cycle of rising prices and wages.”
Of course, a lot of things changed between July 2021 and March 2022, including a Russian invasion in Ukraine, ongoing supply-chain issues, and a seemingly never-ending series of COVID-19 variants that, while also seemingly decreasingly severe, continue to demonstrate troubling virulence. With inflation skyrocketing to 8.6 percent in May – the highest level since 1981 according to the Consumer Price Index (CPI) – Federal Reserve Chair Jerome Powell has now changed his tune and adopted an aggressive policy of rate hikes that have already resulted in mortgage rates rising to just under 6 percent.
“Consumers have not seen mortgage rates above 6 percent since 2008,” observed Greg Schwartz, CEO and founder of lending business Tomo. He added, “The pace of this move is what is most concerning, as consumers’ buying power evaporated quicker than any time in recent memory.”
National Association of Realtors (NAR) chief economist Lawrence Yun warned that inflation and rising interest rates will “shrink the buyer pool” and take sales numbers down below 2019 levels. He predicted mortgage rates would not stabilize until inflation starts to fall. Powell’s statements seem to indicate the same. He told an audience recently at that he expects another increase of “50 or 75 basis points” but also warned the Fed will make decisions “meeting by meeting.”
Boston Globe columnist Larry Edelman summed it up bluntly, writing just before the latest rate hike, “Make no mistake: The Fed intends to break the back of inflation by any means necessary – even if that means a ‘hard landing’ with borrowing costs jammed so high the economy nose-dives into a job-killing recession.” Real estate investors will be affected particularly by the cost of materials, which could skyrocket overnight and affect profit margins and projected returns as well as replacement costs on insurance. The best way for most investors to prepare will be to work with connected, established investment firms that can help keep projects moving on schedule and that have existing relationships with inspectors, contractors, and suppliers.