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Real Estate: Not Safe From Inflation Threat

Posted by Staff Reporter on Apr 04, 2016 05:41 AM EDT
August Existing Home Sales Drop To Lowest Level In 7 Months more big
A home is offered for sale in the Bucktown neighborhood on September 21, 2015 in Chicago, Illinois. Sales of previously owned homes fell more than expected nationwide in August following three months of gains. The slump has been attributed to lack of inventory and rising home prices. (Photo : Getty Images/Scott Olson)

Real estate inflation had already been on the minds of many this year due to the increasing energy prices. Federal Reserve cost experimentation would most likely inflict a new major inflation on the U.S.. This though was much more likely happen in the next business cycle. Before that happens, the market will suffer an economic slowdown or even a recession which will create some pause to the gains made. Many households had wondered whether their main assets will insulate them from the shock whenever it will occur. Economic science had said it will be unlikely.

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House prices performed best in the monetary cycle's asset-price inflation phase. During that period, low and zero rates stimulated investors to look for yield, which many did to shed their skepticism. The rise in irrationality in many marketplaces was why some economists described price inflation as a disease. The housing and commercial real estate markets usually became infected by this disease at certain stages, according to a feature from National Mortgage News.

Real estate markets were not shielded from the irrationality. Speculative stories discussing real estate flourishes quickly gained popularity, whether it was the growing housing shortage in metro centers or the illicit money pouring into the high end from all over the globe. High prices rippled down to low layers of the market and the safe haven of goods and services  cased inflation to accelerate.

Real estate inflation defied many economic experiences. By the time inflation shock emerged, home prices had already increased that the real terms under asset-price inflation could not keep up with goods and services inflation. It eventually fell in nominal terms. Observers thought of the point where the gold price in the Paris black market during World War II hit its peak just before the Germans arrived in the city in May 1940, according to a feature from Politico.

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