Wednesday, May 17, 2006

Nightmare Scenario?

Interesting article at MarketWatch today (Housing slowdown behind rise in inflation). The whole thing is worth a read, but here's the idea: housing is factored into inflation through rents, not house prices.

During the housing boom (while house prices surged) weakness in rental prices made CPI inflation (as measured) low, allowing the Fed to justify low lending rates.

Now this virtuous cycle is reversed: declining affordability means rental demand and prices are picking up, contributing to inflation pressures and further Fed action, which could further decrease affordability. The net effect in this nightmare scenario: increasing rents, increasing borrowing costs, falling home sales, and declining house prices (with increased borrowing costs offsetting an unknown portion of the decrease in purchase price).

No comments: