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Realty Times Outlook - Is Inflation Contained?

Written by on Sunday, 22 January 2006 6:00 pm

Consumer prices were up for the year. Now we find out they're down. What does consumer spending have to do with housing? A lot.

Spending is largely psychological. When things cost more, people tend to pull back. They tend to spend when they feel confident of their jobs, consumer prices and buying opportunities. What about housing? There's a lot of positive news that suggests that housing may have had its "rest." Spring might catapult housing into another record year.

Let's look at the marketplace conditions. Consumer prices rose by the largest amount in 5 years in 2005. Then in December, they fell unexpectedly. As a gauge for inflation, this is good news. The cost of energy, transportation and clothing were actually lower than the price of education, food and shelter. Over the past year, consumer prices have climbed 3.4 percent, which is slightly below the norm, but it's faster than the government would like to see -- between one and two percent.

Meanwhile, incomes aren't keeping pace with prices and consumers are pulling back from buying anything but bargains.

What happens? Prices start to fall to stimulate buying. Manufacturers pull back on production. With reduced demand, you no longer have inflation -- you have stagflation or deflation, when goods and services cost less.

That's exactly what's happening in housing.

After a record breaking year in 2005, housing starts fell nearly 9 percent to a 9-month low in January. Some say that's a good thing because it reduces the chances of speculative housing being built that could sit unsold.

Mortgage interest rates have drifted down, a half a point lower than they were in December, putting them close to six percent or below for a 30-year fixed rate loan. In addition, building permits dropped over 4 percent, which means the new housing market will be a little tighter, but demand is still there.

Demand could be partially driven by positive news in jobs, where unemployment claims tumbled to the lowest level in nearly six years.

Now most analysts say that wintertime statistics are volatile because of unpredictable weather, but the trends appear positive all the same. Just as Realty Times predicted back in December, marketplace conditions are strongly favoring buyers. We say, "Take advantage of winter prices with less competition from other buyers, more houses to choose from and lower mortgage interest rates so you can afford to buy more house. Your risks of buying on speculation are reduced and that makes it a great time to buy a home."

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  About the author, Blanche Evans

Individual news stories are based upon the opinions of the writer and does not reflect the opinion of Realty Times.