ECONOMISTS' COMMENTARY: INFLATION OUTLOOK

ECONOMISTS' COMMENTARY: INFLATION OUTLOOK

Deflation has arrived but inflation could be flaring up in a couple years. The latest March consumer price index showed the first decline over a 12-month period since the Eisenhower administration. With rising unemployment and excess industrial capacity there is virtually no pressure for wages or prices to rise. The first order of business – from the Federal Reserve point of view – is to stop the deflation from spiraling down, which could lead to years of a Japanese-style economic stagnation. The mindset in this situation would be one of ‘why buy now if I can buy just about every consumer product at a cheaper price later?’ However, postponing purchases freezes economic activity.

The Fed has been madly pumping out money to help kick-start the economy and to help ease the credit crisis. The Fed’s balance sheet has grown exponentially in the past year to now more than $2 trillion. This money is essentially off the printing press. Over the short term, more money into the system and easier borrowing standards will inevitably stimulate the economy. However, too much money for too long in the system will spark inflation. Prices of just about everything – from hamburgers and airfares to tuition and wages - will rise. In addition, if (or perhaps I should say ‘when’) inflation does rise – say 5 percent or even closer to double-digits – there will be distinct winners and losers.

The big winners will be property owners. Paper money will lose its purchasing power, but real tangible assets will rise in value. Real Estate, by nature, is imbedded with commodities, and is sitting on land, which cannot be printed off a printing press. As it has happened around the world throughout history and more specifically during the 1970s and early 1980s in the United States, property values rise with consumer price inflation.

The big losers will be those who need to borrow money. High inflation automatically brings high interest rates. Lenders will charge a higher rate to compensate for the loss in purchasing power. Be it a homebuyer or small business owner or even the government, those who need to borrow at that time will face burdensome interest payments.

It is possible that we will not see inflation when the economy gets back on track. The Fed may be able to mop up the cash that was distributed. However, some of the money printed, without being too technical or using jargon-like acronyms such as TALF (Term Asset-Backed Securities Loan Facility), was for the longer-term where the Fed cannot automatically soak up the cash. That leaves a distinct possibility of inflation picking up due to too much money chasing around the economy. The economy, though growing, will also be operating sub-optimally because high inflation introduces unnecessary uncertainty for business start-ups and entrepreneurs.

What is the bottom line? Yes, inflation could be contained. However, it is also possible for it to get out of hand. If that happens, property owners will be in the winner’s circle. Those property owners who locked-in low mortgage rates will further benefit from constant loan payments independent of future inflation. However, homebuyers, property owners, and other borrowers at the time of high inflation will be shut out of the market because of exorbitantly high interest rates.

Todd G. McKissick, CRE, CFA, CCIM, FRICS
McKissick & Company, Inc.
Real Estate Economics
tmckissick@mckissickco.com
678.296.5091

LinkedIn: http://www.linkedin.com/in/mckissickco
Facebook: http://www.facebook.com/people/Todd-G-McKissick/1450014388
MySpace: http://www.myspace.com/mckissickco
Twitter: http://twitter.com/tmckissick

Governor Beshear announces help for first-time home buyers

Governor Beshear announces help for first-time home buyers


FRANKFORT, Ky. – Gov. Steve Beshear announced today a special initiative by Kentucky Housing Corporation (KHC) to offer up to $4,500 for down payment and closing costs for first-time home buyers who obtain a KHC home loan. The program will begin on May 1, 2009 and continue through Nov. 30, 2009.

The First Home Advantage Program provides a second mortgage with principal and interest payments deferred until July 1, 2010 for KHC-approved, first-time home buyers.

“For many first-time home buyers, the biggest barrier to homeownership is the ability to pay upfront expenses, such as the down payment and closing costs,” said Gov. Beshear. “The innovative First Home Advantage Program will not only help qualified Kentucky home buyers overcome this barrier and realize their dream of owning a home, it will hopefully reinvigorate the housing market help get our economy moving in the right direction.”

The First Home Advantage Program offers a 10-year loan that defers payment with a zero percent interest rate until July 1, 2010. After the initial deferment period, the loan will fully amortize over ten years at the rate of 6 percent. If the borrower pays off the loan before July 1, 2010, KHC will forgive $300 of the principal balance.

The American Recovery and Reinvestment Act of 2009, signed into law by President Barack Obama on February 17, 2009, provides first-time home buyers with an $8,000 tax credit. After purchasing their home, home buyers have the opportunity to file for the housing tax credit provided by the stimulus on their 2009 tax returns and use the tax credit for the repayment of the First Home Advantage Program loan to take full advantage of the prepayment incentive.

“We want to do everything we can to help Kentucky homeowners purchase their new homes,” said Richard L. McQuady, chief executive officer of KHC. “The First Home Advantage Program allows home buyers to take advantage of every opportunity available to them in these difficult times.”

In order for home buyers to qualify for this program, they must obtain a KHC first mortgage through a KHC-approved lender, be a first-time home buyer, meet KHC income and purchase price guidelines, and have a 620 minimum credit score.

To learn more about KHC’s homeownership programs, visit their Web site www.kyhousing.org.