Inflation is a measurable increase in the costs of goods and services. Inflation is something that as ordinary citizens we deal with everyday. High costs at the the gas pumps, $4 a gallon for milk, higher prices at restaurants, food, produce, transportation...the list goes on. It is sticker shock! So how does it impact our business? First of all, buyers take a holiday, and then real estate sales cool for many reasons.
The first thing that happens wiht inflation is that consumers go into price shock, and their confidence on how things are going to turn out at the end of the story. Personal survival becomes a primary goal of the individual. The consumer becomes less likely to make high price purchases out of uncertainty of their future dollars worth and the impact it will have on their sucurity as it is measured in personal finance. Higher prices in our daily lives makes us very conscious of the increasing cost of living, and the impact on our budgets. We first become aware of the creeping inflation as our bills start to arrive in the mail. At first glance we are looking for a mistake or an error because we question how the bill could be this high. It is an easy situation to fall into when we rely on credit as opposed to cash. The sad thing about inflation on the economy is that it has to to be fixed, and cannot go unchecked. Inflation robs the economy of confidence. Inflation can break an economy as it did in Germany with hyper inflation. With hyperinflation it could take wheel barrows of money to buy a loaf of bread. That is not a good thing. So what is the fix? Well the first fix in any responsible government will be to raise interest rates. Cheap money (Low interest rates) only fuels inflation. Raising interest rates cools the demand because the cost to borrow increases. So what a lot of people that are waiting for lower real estate prices do not realize is that their carrying costs to buy a cheaper home may cost more money for less money borrowed. A $70000 dollar mortgage in 1980 cost about $1500 / month in PITI. There is an axiom in real estate that says "Low rates - higher prices, Higher rates - lower prices"
As it relates to real estate this is not good, and could not have come at a worse time. Since real estate is already in a deflationary cycle, the fix for inflation is going to be similar to curing a patient by killing him. Eventually it will cause a further softening of value, because the ability to obtain financing will move beyound the reach of many would be home buyers, and it will influence what they purchase, and what they are willing to pay for it on a monthly basis. Rising interest rates will also have a major impact on the higher end of the market. It is just not the cost of aquiring the higher end of home, and the cost to heat, cool and maintain it. Buyers will definitley start to re-think what they are purchasing, what will it cost to maintain it, and will it work with their budgets if other prices continue to rise.
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Jim, imagine if rates rise to 7, 8 or 9 percent. At various times in my career those were pretty tantalizing rates. Today they sound horrific.