The prices of things that companies pay to make products are falling. This is an early indicator that consumer prices are likely to be well-contained and thereby delay interest rate hike by the Federal Reserve. But the prices on construction-related goods are rising.
In February, producer price index on finished goods was lower by 3.4 percent from one year ago. The prices on the intermediate and crude products – those things that are not yet in a finished form – plunged by an even larger amount, 6 percent and 25 percent respectively. Such a trend bodes very well that inflation is far away. The best guess on the eventual filtering impact to consumer prices is such that the cost-of-living-adjustment (COLA) on social security benefits checks in 2016 will be zero. Difficult to swallow, but there will likely be no increase on the amount of the social security benefit checks next year.
Even though prices of many things for producers are falling, that is not the case for the construction industry. The prices of raw timber and sand (used for construction) have consistently been moving higher, both about 2 to 3 percent higher. The price of cement is way up by 9 percent. The newly constructed home price will therefore rise – from both the broad inventory shortage and due to increases in the cost of construction.
Already the gap between the newly constructed home price and existing home price is very wide. Since the price of new homes is unlikely to decline, the price of existing homes will likely need to rise faster in the upcoming years to get us back to the historical normal spread.
As an aside, the prices of things we eat at the early stage of production (not the consumer prices at grocery stores) are moving in the following way: wheat (down 12 percent), corn (down 12 percent), slaughter hogs (down 43 percent), slaughter broilers (down 2 percent), raw milk (down 34 percent). One major food item that is rising is the price of slaughter cattle (up 15 percent). For the benefit of the wallet, therefore, it’s time to give up rib-eye steak. One can read The Jungle by Upton Sinclair to get disgusted about meat processing and packaging. Or one can switch to pork chops and bacon.
Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.