The “R” Word

As someone who makes a living based on what’s happening in the housing market, I tend to pay a lot of attention when I hear the r-word being thrown around, r as in recession.

According to Investopedia, a recession is a “significant, widespread, and prolonged downturn in economic activity.” Economists often define a recession as two consecutive quarters of decline in gross domestic product. For politicians running for office, the definition tends to support whatever snake oil they’re trying to sell. If they’re an incumbent, we are not in a recession; if they are a challenger, we are most definitely in a recession.

It seems pretty clear to me that the economy is stagnating, but we are also seeing inflation. This is an unfortunate combination. If it were a regular recession, we’d see declines in economic output, consumer demand, and employment. This would mean the price of goods would remain stagnant or decline, interest rates would drop, and unemployment would rise. But when an economic downturn is paired with inflation, we get “stagflation.” (This is what happened in the 1970s, for those who have been around long enough to remember.)

The fallout from the pandemic is part of why inflation is on the rise. Interrupted supply chains have increased the demand for goods (and therefore, the price). Right now, inflation is between 9 and 10 percent overall, and in sectors like building materials and energy, far higher.

So, what does all this mean for those of us in the working economy? If you’re an employer trying to hire entry-level employees, I doubt you’re having much luck, and it’s only going to get worse. Governor Newsom just signed a law with the potential to increase the minimum wage in the fast-food industry, maybe to $22 per hour. I’m all for a living wage, but if we increase the minimum wage by 40 percent overnight in one industry, it will upset the apple cart. Businesses with entry-level positions will need to increase their wages at a time when revenues are declining. Initially, it will be good for workers, but I expect it will lead to another burst of technology that replaces humans (like the self-serve check-outs in grocery stores).

For business owners and consumers, supply chain interruptions are making everything more expensive. And if you are a prospective home buyer, not only are houses more expensive, but interest rates are also on the rise. What should you do?

The best advice I can provide is this: make sure that whatever you buy, you’re comfortable with the cost for the foreseeable future. Do not buy something if you’re counting on the ability to refinance it as soon as rates get back to normal. First of all, “normal” is hard to define. Secondly, no one knows how long, or even if, we’ll get back there.

The home you buy should meet your needs both in terms of its amenities and with the financial burden it represents. Keep in mind that the cost of owning a home does not stop with the monthly mortgage payment.

The actual cost of home ownership is best calculated by the sum of the monthly mortgage payments plus three percent of home’s purchase price. For a $500,000 home, you’d add $1250 (which is 3 percent of $500,000 divided by 12 months) to your monthly mortgage payment of $2500 to brings your total monthly housing expenses to $3750. This number allows you to estimate the cost of your mortgage, taxes, insurance, maintenance, and repairs. It does assume the house is in good condition when you buy it. A fixer upper will require more.

Long story short, if you can afford to purchase a house, this remains a good time to do so, because while your maintenance and repair costs will go up with inflation, your fixed-rate mortgage will not. Even though interest rates are higher than they were a year ago, they are in line with historic rates during the last 50 years. And, although housing prices are higher than they were two years ago, they are in line with long-term price appreciation, and this will benefit you in the long run as your property appreciates in value.

If you have questions about property management or real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.

Dick Selzer is a real estate broker who has been in the business for more than 45 years.



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