A Sticky Messy Economy

You go out to the store to buy some groceries. You start looking carefully at prices and ask yourself if you really need to buy that top brand of peanut butter. Maybe a cheaper brand will do.

You’ve got over 200,000 km in your car and wonder if it’s time to buy another. Repairs are piling up but the price of a new car sounds like an old-style house price. You wonder if your handy uncle Joe can help you change the oil and tune it up. You decide to not look for a car until things out there get better.

Prices are staying high on most things and rising in North America. People are losing their jobs, and job security which makes them more reluctant to spend. Rising interest rates are killing the buying and selling of real estate.

I just checked out a duplex that a year ago was selling for just over a million dollars. It has beautiful ocean views and is completely renovated in and out. The income projected is likely in the $6,000 per month range. At $72,000 in gross income, I’d only start getting interested if the price was $500,000. I value it at much less. It’s been on the market for over a year now reduced by 20% but still a few hundred thousand dollars to go to my number. If I were truly interested, I’d start offering to purchase, but I have no interest in owning a duplex in that area with no history of rental income. It’s still a fantasy price with projected income. Projected income is also a fantasy. The building is worth $400,000. Another $400,000 price drop is needed to reach a reasonable value.

Drag Inflation or Stag Inflation refers to prices staying high or going up, with little demand and unemployment rising. Psychologically and actually unemployment is rising. People are not secure in their jobs. Working from home was the golden benefit not that long ago. Now we know that also means you don’t really exist when it comes to making tough layoff decisions. Those working from home are the first to be let go when companies cut back, and cuts are happening now.

So, people stop spending. Companies start firing and not hiring. People become anxious even if they have a job and start spending less. A spiral of a sticky economic mess is upon us.

Eventually events and circumstance will make a seller understand that the buyer of real estate, for example offering $500,000 now with mortgage rates at 7%, is the same price as 1 million dollars a few years ago when rates were 2%. That hasn’t sunk in yet. Most sellers don’t understand that, and unfortunately neither do most buyers.

This means that right now many sticky messy money accidents are happening. Sellers of real estate are hanging on to stupid prices dreaming of a few years ago. No one is offering. Buyers still think the market will only go up but fortunately in most cases their fantasy is destroyed by the paranoid bank-lender. Ironically bankers by tightening their lending may be saving many people from eventual bankruptcy. If you can’t get the mortgage, you can’t pay the stupid inflated price for that dream house. Saved by the bad banker.

Parents of adult children, however, may be the key to destroying this generation of buyers. Providing free money for huge down payments or actual outright purchases of fantasy personal homes is a stupid thing to do. If a bank won’t do it, don’t do it. Drag and Stag Inflation will destroy you. It’s a sticky messy economy.

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