Austin Real Estate Blog

The National Association of Realtors has been telling us for the last few years the real estate recovery is just around the corner. I don't know when the market will recover but when it does it's not going to be a clean recovery.

Here is a graph of the monetary base since 1959.

The first time I looked at it, I didn't notice the crazy spike at the end. That is the growth in the monetary base in the last year while the Fed has been trying to stimulate the economy. So why are we not currently experiencing double digit inflation?

A recession pushes down inflation, and a very strong recession has an ever stronger effect on keeping down inflation. During the Great Depression we experienced the opposite of inflation, which is called appropriately, deflation. Here is a historical chart of inflation showing the deflation we experienced during the Great Depression.

Currently we have two powerful and opposite forces: 1. a heavy recession pushing inflation down; and 2. a large amount of money being pushed into the economy, forcing inflation up. When the economy starts to recover, the mechanism keeping inflation in check will disappear.

The question, of course, is how high inflation and interest rates could go. The last time we experienced hyper-inflation was the period from 1978-1982. Looking at the above chart, inflation hit 15 percent. Below we have a chart showing mortgage rates from 1974 to 2009. Mortgage rates hit a high of 18.5 in 1981.

The forces at play currently seem stronger than what was experienced in the late 70s and early 80s, but it's hard to know exactly how high rates will go. Regardless of the exact rates: hyper inflation is coming. Our next blog will look at how this will effect the real estate market.