Having spent the past 22 years working in the Washington residential real estate industry I’ve been through quite a number of house price scenarios such as appreciation, contraction and stagnant growth. And the past six months has got me thinking – are we about to enter another phase – Deflation?
Why I believe deflation is likely
Put simply, economists define deflation as a reduction of prices in all sectors of the economy. There has certainly been a falling off in commodity prices over the past six months, as well as a huge drop in oil prices and the contraction of the Chinese economy.
But isn’t falling prices a good thing?
On the surface, deflation seems to be a good thing since more people have more money to spend. But actually, in times of deflation our economy starts to shrink.
Take the example of gas prices. I did not believe I would ever see gas prices at the pump for less than $2.00 a gallon in my lifetime again and, like most people, I’m delighted to see how little it costs to fill up the auto. It gives me more money to spend on other products and services.
But give it a few months and as deflation starts to take hold companies will stop hiring, employees get laid off, credit becomes more difficult to obtain and consumers understandably start saving their cash for a rainy day. In effect, low prices can cascade into a full-blown economic nightmare.
But the dollar is going up in value
Sure, as the dollar rises it gives consumers more purchasing power. But it also creates an incentive to save cash rather than spend or invest it in goods and services. If the consumer stops spending money, businesses stop investing, banks stop lending, and our economy shrinks. This is the exactly the situation Japan has been in for the past two decades – and it still doesn’t look like their difficulties are going to be solved anytime soon.
Real Estate indicators of deflation
In recent weeks I’ve been receiving lots of e-mails with headings in the subject line such as:
- New Lower Price on Colonial in Rockville!
- Agent Bonus if Contract by Valentine’s Day!
- Price Reduction on Luxury Condo in Northwest!
This sounds like desperation to sell. Certainly when I renovate a home I can’t afford to offer huge reductions. Instead I choose to work with the first buyer that expresses interest in the home and I have to be prepared to be flexible on price adjustments and offer terms. My analysis has to be precise every time and based on conservative estimates of value and future growth of the asset.
How does this affect you?
If you’re considering selling a piece of real estate then now is the time to do so. Even if we don’t actually enter a time of deflation, prices may remain stagnant for at least the next five years.
History – and experience – has taught me not to be ostrich-like and stick my head in the sand when the evidence is all around me. Because of this I have put measures in place to protect my business and my assets if deflation rears its ugly head in the very near future. You should certainly think about doing this too.
Cash is King in deflationary times as the dollar increases in value. This makes NOW the best time for selling real estate.
Make this year a great year for your business!
Washington REIA Network, President
Profitable Property, Founder