Is Rising Real Estate Inflation Harmful? – Orange County Register

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Bubble clock»Explores trends that may indicate impending economic and / or housing problems.

Hum: A warming economy is pushing up the cost of living in Southern California and the country and raises concerns about higher interest rates that could hurt property values.

A source: Consumer price index and its regional sections.

Trend

How hot is it? Well, inflation in May in the Inner Empire was 5.9% a year versus 3.9% in Los Angeles and Orange counties. Nationally, the consumer price index rose 5% – the most in 13 years.

This is a big change for shoppers who are adjusting to the resurgence of the economy.

A year ago, businesses and jobs were frozen by viruses as sellers cut prices to attract customers. Inflation in May 2020 in the four-district region was 0.9%, up from 0.1% nationwide.

And if you can remember the good old days of May 2019, when the economy was in full swing, we saw 2.9% inflation in IE; 3.1% in LA-OC; and 1.8% at the national level.

Dissection

Getting back to normal is a big problem.

The urge to spend grows as business restrictions designed to slow the spread of the coronavirus have been eased and vaccinations have made consumers more comfortable going out. Increased demand for many products and services has raised prices, in particular two of them related to the resumption of travel: gasoline and used cars.

Locally, higher inflation in the Inner Empire reflects a more robust economic recovery compared to, say, Los Angeles County, where unemployment was 11% in April versus 7% in the rest of the state.

A breakdown of Southern California by key consumer spending categories – Riverside and San Bernardino counties versus the LA-OC metro area – shows where prices are highest.

Start with your biggest expenses, housing …

Lease of the main residence: An increase of 1.8% y / y in inland areas compared to 0.9% in coastal areas.

Household energy: An increase of 13.5% domestically compared to 10.6% on the coast.

Home furniture, operations: An increase of 6% in inland areas versus 2.1% with deflation in coastal areas.

Then look at the food …

Foodstuffs: 2.3% inflation in both inland and coastal areas.

Dinner outside the home: An increase of 2.1% in inland areas compared to 4.4% in coastal areas.

Alcohol: An increase of 7.3% in inland areas compared to 3.1% in coastal areas.

Driving is much more expensive …

New cars: 2.9% inflation within the country versus 1.8% on the coast.

Used cars: An increase of 29% in inland and coastal areas.

Petrol: An increase of 49% inland compared to 46% in the coastal area.

Other purchases …

Clothing: Domestic inflation is 5.2% versus 7.2% on the coast.

All services: An increase of 4% inland compared to 2.2% in the coastal zone.

Health care: An increase of 3% inland compared to zero in the coastal zone.

Relaxation: An increase of 2.5% domestically compared to 2.1% on the coast.

Tuition fees / childcare: An increase of 2% in inland areas versus 2.6% with deflation in coastal areas.

Warning

The economic recovery has clearly been fueled by historically low interest rates created by the Federal Reserve. Discounted funding has clearly led to a recent surge in home purchases.

But don’t forget that the Fed is also monitoring inflation. If inflation becomes too problematic, the central bank can act in such a way as to abandon home loan transactions.

Note that some economists are watching a weird CPI – the cost of living minus food and energy – that tracks what is considered “core” inflation. Last year, it grew by 4% in inland areas compared to 2.1% in coastal areas. If you could live without food and energy!

How Sparkling?

On a scale from zero bubbles (no bubbles here) to five bubbles (warning about five alarms) … FOUR BUBBLES!

“Current wisdom” is that the spike in inflation this spring – the highest level since before the Great Recession – could be a short-lived spike, reflecting a strong recovery from the worst days of the pandemic era.

Let’s hope that the half-glass guess is correct.

Why? Think of another time when inflation exceeded 5%: in the early 1990s, when the housing bubble burst in the previous decade. This bout of inflation did not end well for the local economy or home prices.

Jonathan Lansner is a business commentator for the Southern California News Group. You can contact him at jlansner@scng.com

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