U.S. Should Be More Concerned About Deflation Than Inflation, According To Some Economic Observers

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Outside of the Great Depression in the early 1930s and for a very short period during the nation’s economic collapse in 2008 and 2009, the United States has not seen an extended period of the economic phenomenon known as deflation. 

And while the U.S. has seen unprecedented inflationary conditions in the past year, there has been little talk of the potential of deflation — when the prices of goods and services decrease across the total economy. 

While Federal Reserve Chairman Jerome Powell leads the continued charge to tell Americans to feel the pain of interest rate hikes in an effort to curb inflation, a recent opinion piece in Politico claimed it's the wrong strategy. Dartmouth College economics professor David Blanchflower called the Fed’s reliance on interest rate hikes “guessenomics on zero data” and predicted a period of deflation might be the result.

Another jarring indicator of deflation, according to Bloomberg, is the home and apartment rental market has dropped sharply in the past 90 days, and vacancies are rising.

The warning of the potential of deflation, using real estate trends as a marker, was also echoed by EasyKnock Inc. CEO Jarred Kessler, who told Benzinga in a wide-ranging interview that deflation may be at hand. 

“I haven’t seen real deflation in my or my parents’ lifetime, but as bad as the economy we’re looking at is,” we may experience a deflationary period ahead, Kessler said.

Kessler, who has over 15 years of experience in the financial services industry, has worked with financial industry leaders and started EasyKnock as a way for homeowners to gain access to equity by selling their property and renting it back. 

Kessler believes the current economic woes began with government stimulus programs and have transitioned to an 18-year high in credit card debt, meaning people will start drawing on their home’s equity again because “there aren’t a lot of options left.” 

While he predicts the Fed will soon stop raising interest rates, he also believes it’s also going to be more careful how it communicates any future increases because it’s realized “they’re scaring the market.” In his industry, Kessler lamented the rise of mortgage lender bankruptcies in a housing market where buyers have become scarce. 

“I’ve never seen an industry in my career to so quickly from hot to cold as the current mortgage sector,” he said. 

Heading into 2023, Kessler shared other economic predictions, including: 

  • The prediction of home prices dropping as much as 25% by next summer is overblown. Kessler believes the country will experience a 10% drop in areas such as the Midwest, but “heavy migration cities like Nashville, Austin, Miami and Phoenix, for example, which have had extraordinary runs, are going to see sharp decreases as people look for more affordable areas to relocate to.”
  • The hot cities like those in the Sun Belt are also being hit by the fact that “65 million people cannot qualify now for a mortgage they could afford six months ago.”
  • The trend of the disappearing buyer will continue, but while “most people think they’re scared to get into the market, the fact is that most, because of high-interest rates, can’t qualify because of their debt-to-income ratio or their FICO credit scores are not where they should be. It’s a really big problem in this economy.” 

As for the consequences of a volatile housing market, Kessler says next year, people with means, including a cash reserve, are going to be looking at some great opportunities. 

“You’re going to start seeing fire sales and desperation in the real estate market, and the people who can take advantage of that financially will benefit. My advice next year for them is to start by bidding low.”

See more on real estate investing from Benzinga

 Photo by Joshua Woroniecki on Unsplash

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Posted In: EconomicsFederal ReserveReal EstateAlternative investmentsDeflationInflation
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