While I agree that is a conundrum so to speak as to how geopolitical factors exacerbate domestic tensions via energy shortages. It’s not really an issue that rate cuts can fundamentally fix. Nor is the inflationary organic since it will cause a relative shift in consumption eventually causing demand destruction.
Correct! Oil and energy prices are rising due to a logistical issue, not a monetary issue. Higher interest rates wouldn’t fix this but they would continue to destroy affordability
Infrastructure has been largely neglected for the last 30 years. Whether that's affordable starter homes or bypass oil pipelines. The solution has been banking and bombs instead of excavators and tradesmen.
been a while since i've seen some RE talk, good stuff. I've played some RE over the years (resi + commercial) and huge factor for me is the simplicity of the "PE multiple" on resi: Median Household Income / Median Home Px. Whether it's nationwide or region-specific (more relevant), it doesn't look pretty ...
I’m really curious to see how they navigate this, and I think it’s shown just how not ready we’ve been for unexpected supply shocks given the gas prices shooting up.
I enjoyed the article but higher oil prices do not automatically mean a major inflation wave, more Fed hikes, and an even worse housing affordability crisis. Fuel costs can push some prices higher, but the pass-through into broad inflation is usually limited because transportation is only one part of the final price consumers pay.
Food is about 13.7% of CPI, and food at home is about 8.3% of the basket, so even noticeable price pressure in one area of groceries does not translate into a large move in overall inflation. Motor fuel is about 3.0% of CPI and total energy is about 6.4%, which matters, but it still is not enough by itself to reset the entire inflation picture.
The other side of the equation is demand. An oil spike can act like a tax on households by taking away money that otherwise would have been spent on discretionary goods and services, which can slow the broader economy instead of overheating it.
That matters even more in a softer labor environment. January payroll growth came in at 130,000 after major benchmark revisions, February payrolls then fell by 92,000, and CPI inflation in February stayed at 2.4% year over year, unchanged from January.
So the better takeaway is that higher oil may squeeze consumers and hurt growth without creating the kind of broad, persistent inflation that would justify more rate hikes. If anything, the Fed looks closer to a point where overtightening would risk doing more damage to growth and housing than the oil move itself.
I don’t have a crystal ball, but this is my take: even if oil prices stay high for a year, the net pressure on inflation is probably still pretty limited. Tariffs likely would’ve created more price pressure than higher oil prices, and inflation still hasn’t risen much. If oil stays elevated, it’ll mostly change where consumers and businesses put their money, not create a broad inflation problem.
Great read! Something else to consider: Higher rates don’t just reduce purchasing power, they freeze supply. Existing homeowners locked into 3% mortgages aren’t selling, which means inventory stays tight even as demand weakens.
And that is a big part of what is squeezing supply. I know a lot of people who have 3% mortgages who have no intention of moving and selling that home only to have to pay 6.5% for a mortgage
While I agree that is a conundrum so to speak as to how geopolitical factors exacerbate domestic tensions via energy shortages. It’s not really an issue that rate cuts can fundamentally fix. Nor is the inflationary organic since it will cause a relative shift in consumption eventually causing demand destruction.
Correct! Oil and energy prices are rising due to a logistical issue, not a monetary issue. Higher interest rates wouldn’t fix this but they would continue to destroy affordability
Absolutely agree. The rising price level with lower circulation absolutely exacerbates the affordability issue.
Infrastructure has been largely neglected for the last 30 years. Whether that's affordable starter homes or bypass oil pipelines. The solution has been banking and bombs instead of excavators and tradesmen.
Companies have focused on speculating instead of actually investing in improving productivity and now the chickens are coming home to roost
been a while since i've seen some RE talk, good stuff. I've played some RE over the years (resi + commercial) and huge factor for me is the simplicity of the "PE multiple" on resi: Median Household Income / Median Home Px. Whether it's nationwide or region-specific (more relevant), it doesn't look pretty ...
Right now we are in an environment where we have high rates and high prices, so something gotta give here
I’m really curious to see how they navigate this, and I think it’s shown just how not ready we’ve been for unexpected supply shocks given the gas prices shooting up.
Yes, and that’s why now both sides of the War are trying to rush to come up with a peace plan
I enjoyed the article but higher oil prices do not automatically mean a major inflation wave, more Fed hikes, and an even worse housing affordability crisis. Fuel costs can push some prices higher, but the pass-through into broad inflation is usually limited because transportation is only one part of the final price consumers pay.
Food is about 13.7% of CPI, and food at home is about 8.3% of the basket, so even noticeable price pressure in one area of groceries does not translate into a large move in overall inflation. Motor fuel is about 3.0% of CPI and total energy is about 6.4%, which matters, but it still is not enough by itself to reset the entire inflation picture.
The other side of the equation is demand. An oil spike can act like a tax on households by taking away money that otherwise would have been spent on discretionary goods and services, which can slow the broader economy instead of overheating it.
That matters even more in a softer labor environment. January payroll growth came in at 130,000 after major benchmark revisions, February payrolls then fell by 92,000, and CPI inflation in February stayed at 2.4% year over year, unchanged from January.
So the better takeaway is that higher oil may squeeze consumers and hurt growth without creating the kind of broad, persistent inflation that would justify more rate hikes. If anything, the Fed looks closer to a point where overtightening would risk doing more damage to growth and housing than the oil move itself.
I don’t have a crystal ball, but this is my take: even if oil prices stay high for a year, the net pressure on inflation is probably still pretty limited. Tariffs likely would’ve created more price pressure than higher oil prices, and inflation still hasn’t risen much. If oil stays elevated, it’ll mostly change where consumers and businesses put their money, not create a broad inflation problem.
Yes, there is a good chance that this doesn’t end up having a huge effect either way but we will have to wait and see
Especially if high oil prices end up being temporary. The real question is how long will this last?
Great read — your articles always contain something genuinely interesting.
Great think piece
Great read! Something else to consider: Higher rates don’t just reduce purchasing power, they freeze supply. Existing homeowners locked into 3% mortgages aren’t selling, which means inventory stays tight even as demand weakens.
And that is a big part of what is squeezing supply. I know a lot of people who have 3% mortgages who have no intention of moving and selling that home only to have to pay 6.5% for a mortgage
The Bond market is pricing for 7% mortgage rates if this war with iran continues
good work
Good read!
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