U.S. consumer sentiment fell sharply and unexpectedly in early July to the lowest level in five months.

Consumers’ complaints about rising prices on homes, vehicles, and household durables reached an all time record.  Just 30% of all consumers cited favorable home buying conditions, the lowest level since September 1982.  What does this change in attitude mean for real estate?

 

What was in the data regarding consumer thoughts on inflation?

U.S. consumer sentiment fell sharply and unexpectedly in early July to the lowest level in five months as inflation worries dented confidence in the economic recovery, a survey showed on Friday.

The University of Michigan said its preliminary consumer sentiment index fell to 80.8 in the first half of this month – the lowest since February – from a final reading of 85.5 in June. Economists polled by Reuters had forecast the index would rise to 86.5.

“Consumers’ complaints about rising prices on homes, vehicles, and household durables has reached an all-time record,” Richard Curtin, the survey director, said in a statement.

The survey’s gauge of current economic conditions also fell to a reading of 84.5, the lowest since August 2020, from 88.6 in June. Its measure of consumer expectations slid to 78.4, the lowest since February, from 83.5.

The survey’s one-year inflation expectation shot to the highest level since August 2008 at 4.8%, up from 4.2%, while its five-year inflation outlook ticked up to 2.9% from 2.8% in June.

 

What are economists forecasting for future inflation

According to a Wall Street Journal Survey of 64 economists, Inflation is expected to surge longer and longer—longer than the Fed previously thought,” said Diane Swonk, chief economist at Grant Thornton. “The Fed is now likely to raise rates in the first half of 2023, although some Fed presidents will be nipping at the bit to move sooner.”

Some respondents worry the Fed could move too slowly. “The danger is that monetary authorities are behind the curve,” said Kevin Swift, chief economist at the American Chemistry Council. “I’m not saying hyperinflation is around the corner, just that a lot of things have come together in the last year, and the overall trend of costs across the board is growing faster than in the last five or 10 years.”

Core PCE inflation rose just 1.7% annually, on average, between 1995 and 2019. Now the Fed wants inflation to overshoot 2% for a while to make up for that shortfall.

Another key measure of inflation, the Labor Department’s consumer-price index, which tends to run hotter than the PCE index, leapt 5% in May from a year before, the most in nearly 13 years.

 

Both consumers and economists are predicting higher inflation.

It is ironic that world renowned economists and the average consumer are predicting the exact same thing; inflation is climbing and will be here for a while.  Yet at the same time the Federal Reserve is sticking their head in the sand saying the forces are transitory.  Unfortunately the markets always win the debate as investors and consumers vote with their money.

The Fed will be forced to act sooner than they currently are forecasting.  If they fail to act, the downside risk will get substantially greater as they will likely overheat the economy and ultimately halt the economic recovery.

What does this mean for real estate?

Economists and consumers are foreshadowing turbulence ahead.  Currently the waters are smooth sailing but there appear to be storm clouds on the horizon.  With markets forecasting inflation, what does this mean for the real estate market.

  1. Shock on interest rates: If the Federal Reserve fails to act in the next 6 months, there likely will be an interest rate shock as chairman Powell keeps messaging that inflation is transitory.  Eventually the markets will call the bluff and rates will react accordingly.
  2. End any refi activity: As rates rise the refinance activity will come to a screeching halt, I expect this to occur later this year as the recent news is factored into longer term treasuries.  When refinance activity dries up, a huge source of liquidity will be turned off to consumers.
  3. In some markets could see prices fall: As rates rise, some markets will see price corrections.  I do not foresee a 2008 repeat, but if the party continues much longer so does the risk of a bigger correction.
  4. Recession: the longer easy monetary policy continues when the market no longer needs the support, the great risk of a much larger fall. It is like climbing a ladder.  Currently we are a few feet of the ground, but as the economy continues increasing due to easy monetary policy the risk amplifies as we get higher up.

Summary:

The economy is running at full steam with pent up demand for everything from cars to trips with consumers ready to spend.  Unfortunately, there is more behind the gasoline fueled binge in the economy; consumers are getting worried with increasing price pressures on everything from food to cars to houses.  This drop in consumer sentiment is backed up by economists as long-term inflation expectations continue to increase.

Although every metric from the consumer price index to the producer price index pointing towards higher inflation, the federal reserve is keeping its foot on the gas with easy monetary policy.  Unfortunately as the economic binge we are on continues to gain speed, the only way it slows down is when there is a major accident.  Now is the time to buckle up as the ride (aka economy) is going to get a bit bumpy ahead.

 

Additional Reading/Resources

 

 

 

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine,  The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

 

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