Skall + Glassman - September 19, 2022


When inflation began to rise in 2021, price pressures were tied to the pandemic and supply chain disruptions. In early 2022, the Russia-Ukraine war impacted gas and food prices, adding to the price pressures. Now it appears that the labor market is exacerbating the situation. The Federal Reserve has raised the federal funds rate (FF) quickly to constrain the economy and slow price increases, with the intent to slow job and wage gains. 

Yesterday, it was announced that the Producer Price index (PPI)* was up 8.69% --not a good number. Speculation that last month’s lower inflation report might allow for a “soft landing” is now reversed with many anticipating another significant increase in the Fed Funds rate -75 bps—some are even saying 100bps. The risk is that the Fed will clamp down on the economy so hard that the US will be in for a “rough landing” (read recession**), where growth slumps and unemployment rises. The idea is that a substantial slowdown in the economy and labor markets will wring inflation out of the economy and back down to the Fed’s target of 2%


*PPI - The Producer Price Index measures change in the prices paid to U.S. producers of goods and services. The PPI is a measure of wholesale inflation, while the Consumer Price Index (CPI) measures the prices paid by consumers. The index is published monthly by the Bureau of Labor Statistics. A change in the PPI often anticipates a change in the CPI. 


**The National Bureau of Economic Research (NBER) defines a recession as a significant decline in economic activity spread across the economy for more than a few months. An official declaration will be made by NBER, but this usually occurs after months of extensive data has been reviewed. In other words, we won’t know for sure if we are in a recession until after the turning point has already occurred.



The housing market has cooled under rising interest rates, and high inflation has taken the steam out of business and consumer spending. Buyers are adjusting to higher mortgage rates and an increase in inventory. Earlier this year, the uber-high-end market was very strong –from housing to luxury goods. Many people traveled to Europe and enjoyed spending money, especially with the Euro and the US dollar close to par. Now, even the high-end real estate market has slowed from its frothy highs. The good news for sellers is that housing prices remain historically high. “Sought after” homes (remodeled for today’s buyers, staged, and priced correctly) will still garner above asking prices (although not as frequently). Partially remodeled homes may only achieve the list price. Homes where Sellers insist upon aspirational pricing will likely endure a longer sales cycle, and lower sales price.


For buyers, the pace is less frenetic. Buyers now have time to make more reasoned decisions. Because of higher mortgage rates, buyers likely have had to adjust their purchase price range. While mortgage have risen over the last few weeks, rates are still historically low. Perhaps even more encouraging for buyers, offers with contingencies are now being accepted. Buyers may also find opportunity in the market from over-zealous sellers who have allowed their properties to grow stale on the MLS. These properties may offer prime negotiating opportunities.


Real estate market changes are often uneven during a transition period. One home will sell in days at well over list price, while next door, another seller has to reduce their list price to get an offer. Buyers become more discriminating, negative conditions previously ignored are noticed, more negotiation occurs, multiple offers and over bidding decline. Listings that are well prepared and priced right will have an increasing advantage. The high appreciation rates of the last 2 years will almost certainly start to decline (which is not the same thing as an imminent decline in prices). Overall, San Francisco and Marin County are behaving more and more like a “balanced market”.

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