Inflation and Recession
As most of the readers of my column know by now, I tend to write on what is the most relevant real estate topic at the moment. I get my ideas from the people I talk with every day. If certain questions come up often, then that becomes the column of the month.
Lately, I have been getting many questions on the topic of inflation and recession and how that can impact real estate prices. These two terms are very common in economic discussions.
Inflation is an increase in the price of products and services over time in the economy. We all know that the price of goods has risen this past year. Just looking at restaurant prices and filling up at the gas station will remind you of just how much. The inflation rate is at about 8% this year, a 40-year high. Economists claim that moderate inflation is beneficial for the economy, but high inflation leads to problems.
A recession is defined as an overall decrease in economic activities as a result of a drop in the gross domestic product (GDP) for two consecutive quarters. Recessions are characterized by high unemployment rates, lower commodity prices, a drop in the price of real assets and low sales.
How are inflation and recessions related? Business cycles go from trough to expansion, then peak and contraction, and repeat again. Our last recession was in 2008/2009 and we have been in the expansion phase since.
Inflation always precedes recessions. When the government perceives inflation to be too high, it starts implementing actions to keep it under control. Tools at its disposal include raising interest rates so that it costs more to purchase goods. The government can increase tax rates so that consumers have less disposable income to spend. The Feds can also control the money supply with more restrictive banking policies.
When this happens, consumers and businesses will have less buying power, leading to the changing of spending habits to more needs than wants. Thus, demand for goods and services will decrease and with it pricing and inflation.
Do real estate prices really drop in San Francisco? I hear that question quite a bit. I can tell you the answer is yes, and I have personally experienced it! In the 1991-1994 recession, real estate prices dropped about 10%. During the dotcom bust of 2001, prices decreased about 10%, and during the 2008-2010 mortgage crisis, we were down about 25%. But San Francisco is a small seven-miles-by-seven miles city with no more land on which to build, each time we have bounced back strong with the pricing peaks above the previous peak. That is where we are at this point in time.
The next question is: Will this inflation lead to recession, and will real estate prices drop? This is important especially if you are in the market and have to make some decisions about purchasing and price. I recommend that you work with a knowledgeable local real estate agent, ask him or her to provide you with an up-to-date listing and recent sales data and perform your own analysis to acquaint yourself with the local conditions.
Agents are on the ground and in the field each and every day. We talk to buyers, sellers, and other real estate professionals and have a good pulse on the market. I can tell you that the real estate market has been pretty active in the first four months of 2022 with low inventories and much pent-up buyer demand; that has resulted in higher prices in certain areas.
The majority of listings I have seen this year have received multiple offers and sold for high prices. My belief is that prices have risen to a level where buyers are hesitant. This will force the prices back to the equilibrium market-level relative to the economy, perceived value and mortgage rates.
As we are in the midst of our spring selling season, there is still not enough supply to satisfy demand. In San Francisco, we have a historically low 1.5-month supply of inventory on the market, meaning that prices should hold up in the near future. I will continue to update you on the market throughout the year.
John M. Lee is a broker with Compass specializing in the Richmond and Sunset districts. If you have any real estate questions, call him at 415-465-0505 or email at firstname.lastname@example.org.
|Richmond Homes Sold in April*|
|855 41st Ave.||3||2||1,595||$1,680,000|
|4826 Anza St.||3||2||1,597||2,050,000|
|823 37th Ave.||3||2||1,875||2,200,000|
|746 33rd Ave.||4||2.5||2,050||2,290,000|
|631 19th Ave.||5||4||2,481||3,000,000|
|883 42nd Ave.||4||3.5||3,086||3,168,000|
|6139 California St.||4||2.5||2,237||3,350,000|
|663 22nd Ave.||4||5||3,300||3,528,000|
|822 Lake St.||4||3.5||3,325||4,260,000|
|1536 Lake St.||4||3.5||3,408||4,730,000|
|6 Scenic Way||4||3||4.160||4,950,000|
|Sunset Homes Sold in April*|
|1754 20th Ave.||2||1||1,150||$1,550,000|
|2691 43rd Ave.||3||2||1,255||1,575,000|
|4016 Judah St.||3||2||1,334||1,650,000|
|4033 Lincoln Way||2||1||1,324||1,670,000|
|2435 25th Ave.||2||1.5||1,353||1,775,000|
|3833 Ortega St.||3||2||1,321||1,900,000|
|1562 15th Ave.||2||1||1,193||2,050,000|
|2439 24th Ave.||3||2||1,475||2,065,000|
|1923 30th Ave.||3||3||1,650||2,100,000|
|1547 23rd Ave.||3||2||1,750||2,125,000|
|2525 22nd Ave.||3||1.5||1,790||2,130,000|
|1819 40th Ave.||3||2||2,714||2,210,000|
|3226 Ortega St.||4||2.5||1,946||2,210,000|
Categories: Real Estate
Thank you, John Lee, for this thorough and understandable examination of the unique position of the San Francisco real estate economy and the national and global economies generally. While everyone’s situation is different, you provide a lot of common ground in these challenging times.