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The Robin Report
Inflation, deflation, and housing affordability
“The best policy is to declare victory and leave.” ~ Senator George Aiken of Vermont speaking about the Vietnam War.
History indicates that human beings tend to double down on losing strategies just before they are forced to abandon them. It seems, we can’t accept defeat until we inflict the maximum punishment upon ourselves for being wrong.
This is the only way to try to make sense of our Federal Reserve’s monetary policy overshoot and similar behavior by the California Department of Housing and Community Development (HCD) with its issuance of grossly unrealistic Regional Housing Needs Assessment (RHNA) housing quotas in the current planning cycle, when interest rates are rising and the nation is teetering on the brink of a recession. The latter will undoubtedly result in a catastrophic failure of California municipality’s ability to meet their latest housing quotas, with dire consequences to follow.
Meanwhile, the media is having a field day obsessing about out-of-control inflation and the need to build more and more housing to ameliorate our affordable housing crisis. But in the real world, inflation is moderating rapidly, and in response to the Federal Reserve’s aggressive rate hikes and threats the housing industry has ground to a halt, indicating that the number of housing units coming to market will be subpar for years to come.
Housing is a far-sighted bellwether. Lumber prices are a canary
Most of the housing construction by major developers that you see going on today was planned years ago. And in most cases, the financing was arranged and the materials used were secured in advance or moderated by sophisticated hedging strategies. Those projects are not affected by current pricing or interest rates, so they don’t tell us anything about the future. But what are the markets telling us now?
Consider the chart below, showing the prices of lumber futures, reflecting the hedging strategies being employed by major developers and their expectations for the future.
This chart is saying that lumber prices will be falling rapidly and are going to fall to levels going back as far as 2012. In other words, inflation in lumber prices is now at zero and prices are at the same level they were before the pandemic in 2020 and are rapidly deflating. Consequently, it’s saying that demand for lumber will also continue to fall, meaning less and less housing construction in the near future.
This shows that in some ways the cure for high prices can be high prices themselves because they ultimately reduce affordability and therefore reduce demand. In this case, the combination of short-term, pandemic-related supply chain issues, labor shortages, low interest rates, and panic buying drove prices to absurd levels, which began to reduce demand even before they were impacted by the rapid rise in interest rates and financing costs.
Reinforcing this trend are gasoline prices, which are a good real-time indicator of overall economic activity and supply/demand, inflationary impacts.
Consider this chart.
This indicates that gas prices today (for regular) are no higher than they were in 2007. And these are “nominal” prices not even adjusted for overall price or wage inflation since 2007. If you factor that in, gas prices have not been this low in decades. Thus, overall gas prices are deflating, which makes sense in an age when we are quickly converting to alternative sources of energy that are becoming price-competitive.
When it comes to inflation, it’s time to declare victory and leave the field. And do so before there is so much damage to housing development that it takes years to recover.
Bob Silvestri is a Marin County resident, the Editor of the Marin Post, and the founder and president of Community Venture Partners, a 501(c)(3) nonprofit community organization funded by individuals and nonprofit donors. Please consider DONATING TO THE MARIN POST AND CVP to enable us to continue to work on behalf of California residents.