The only way that today’s home prices could possibly look “inflationary” is if you’re standing on your head. Which begs the question: If the most dependable hedge against inflation -- namely real estate -- is crashing like the approval ratings of the U.S. Congress, then where does main street get off saying “Inflation” is the bane of our economy’s existence?
See: May 2008 Economist cover story “Inflation’s Back,” and a June 23 Reuters claiming, “The curse of the 1970s is staging a comeback.”
Not even close. The 1970s economy epitomized “Inflation,” as wages, credit, gold, oil and commodities all soared in value -- to the point that President Richard Nixon imposed the first-ever peacetime “price controls” in U.S. history, in addition to eliminating the gold standard.
And few years after Gerald Ford (and his “Whip Inflation Now” policy) left office, the U.S. inflation rate was above 14%, the core Consumer Price Index at 13%, and the Federal Reserve’s lending rate at 21.5%, an all-time high. At the time, American humorist Art Buchwald joked: “It’s cheaper to borrow money from the Mafia than the local bank.”
Last but not least: Home values during the 1970s also experienced a period of rapid price increases, as this chart makes plain:
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Flash ahead to today. To say that inflation is staging a comeback is like announcing a “Beatles” reunion tour minus three band members. As of June 2008, the core C.P.I. stood at 2.3%, the overall C.P.I. at 5.0%, and the Fed funds rate at a subterranean 2%. -- Hey Art Buchwald, it doesn’t get any cheaper than that.
Then there’s the most glaring difference between today’s economy and that of the 1970s: The worst housing market since the Great Depression, which, according to recent data, shows no signs of bottoming. To wit: S&P/Case-Shiller Home Price Index (measures 20 Metropolitan areas) tumbled 17% in May from a year ago -- the biggest decline since records began in 1987. (Also, the number of homes in some stage of foreclosure increased 121% since last year, and the cost of new homes just saw its steepest year-end decline in four decades.)
Consider this fact: The same experts who see a “New Era Of Inflation” underway in today’s economy are the same ones who in 2005 saw a “new paradigm in real estate in which prices rise indefinitely,” a “Loveable Housing Bubble” in 2006, and a “Soft-landing” of home prices, a “well-contained” subprime mortgage crisis, and a “manageable” downturn in banking in 2007-8.
Hitting the economic bulls-eye has not been mainstream economists’ strong point. As for anticipating the end of the five-year long Housing Bull -- and subsequent turndown in every leading financial sector BEFORE it occurred, the March 2005 Elliott Wave Financial Forecast led the way with a special segment titled “Real Estate Bust Begins.”
In that issue, EWI's analysts likened the near vertical rise in the S&P Homebuilding Index to the notorious NASDAQ rally from October 1998 to 2000 and suggested the “potential for a serious unraveling of the housing market” was due. As the following close-up reveals, the S&P Homebuilding Index has plunged 80% from its 2005 peak.