When ‘Transitory’ Inflation Really Means ‘Don’t Worry’

GlobeSt. – Conditions are fueling volatility in home, rent, materials prices as the transitory vs. persistent debate is waged.

Inflation has wreaked havoc on consumer prices and apartment materials are no different. While government officials and others insist the spikes are “transitory,” John Burns Real Estate Consulting sees that as code for “don’t worry” and lays out the case for transitory vs. persistent.

“Transitory” inflation could mean one of three scenarios:

Prices rise and plunge

Prices rise and stay where they are

Prices rise and continue to rise, but more slowly

A sharp and permanent increase in home prices and costs is certainly worth worrying about, John Burns Real Estate Consulting authors Alex Thomas and Eaint Zaw suggest.

“Inflation fears incentivize consumers to lock in payments sooner rather than later, especially if they’re confident they can stay and make payments long-term,” they write.

The Federal Reserve and other members who back a transitory condition “are correct in that some of the drivers of high headline inflation prints over the last several months will resolve themselves over the short- to medium-term (six to 18 months),” Thomas and Zaw write.

‘Goods’ Hit with a Double Shock

Goods have seen two simultaneous shocks to its system created by COVID and associated stimulus.

COVID-related restrictions made goods more difficult to manufacture and transport. The result was supply shortages that allowed manufacturers to raise prices.

However, supply does eventually catch up with demand and manufacturers ramp up to full production. A most common example was the volatility experienced in lumber futures. After soaring in the summer, they have fallen considerably and have wiped out their 2021 gains.

Consumers’ Pocketbooks Loaded

Three rounds of government stimulus in the past two years padded consumer bank accounts and juiced demand (and therefore prices) for goods and services across the economy. Demand will eventually subside as savings are spent.

“Consumers, businesses, and those who expect inflation to be “persistent” are baking inflation expectations into today’s decisions,” the report states.

Of the 210 clients John Burns Real Estate Consulting polled last month, 70 percent believe that the recent rampant price appreciation will not result in a fall from today’s prices during the next five years. Thomas and Zaw expect wages to increase as the supply of workers dwindles from heavy retirements.

“A flood of money into the economy has created buying power that will last years,” Thomas and Zaw write.

Banks have $3.9 trillion in reserves (2x pre-COVID) and “the velocity of money is at an all-time low; money must be spent to show up as inflation, and we have not yet felt the full impact on prices.”

What Consumers Are Expecting

Consumers actually anticipate double-digit increases in rent, gas, and medical care over the next year.

“Demand and supply will eventually meet each other, meaning that inflation will technically be transitory,” the authors write. “However, substantial wage increases are already occurring, which will raise the cost of many goods permanently.”

Plan on the following until the next recession hits, the John Burns Consulting’s report states:

Declining material costs: Commodity prices that are less dependent on labor will eventually fall as supply catches up with demand.

Rising labor costs: Prices for goods that are labor intensive will likely increase and remain high until the next recession.

Rising revenues: Some rent and home price increases will be permanent since home buyers will have more money, but that doesn’t mean home prices can go to the moon.

Questionable land prices: While land is a commodity, residential home prices are a function of the following formula: estimated future revenue – estimated future costs – normal profit margin = land value.

With revenues likely to increase in areas where they haven’t grown too much already, and costs likely to decrease, land values should do well in most areas.