The Inflation Factor

When the Fed does act to raise interest rates to prevent inflation, this is important to our economy. We have been suffering through a recession and tepid recovery for so long, many have forgotten that the Federal Reserve Board's overriding purpose is to use monetary policy to protect us against inflation. In reality, inflation has not been a major factor in our economy for decades. The annual inflation rate in the United States has exceeded 3.0% only five times since 1991 and has not been over 4.0% during this same period of time.

This is not to say that lower levels of inflation do not affect our citizens. For example, if inflation averages 2.5% per year (a bit higher than the Fed's current inflation target), prices will double in 28 years. That may seem like a long time, but consider this. If you bought a home of $300,000 today and the home increases in value at a 2.5% annual rate, it will be worth over $600,000 when the loan is paid off.

Likewise, if someone is paying $2,000 in rent today and the same rate of inflation is applied, their rent would rise to more than $4,000 in 30 years. Thus, the cumulative effect of inflation is significant even when the rate of inflation is low. And even when the general rate of inflation is low, certain areas exceed the general rate. For example, the rate of rent inflation has exceeded the general rate of inflation for the past several years. This has made it difficult for renters to afford housing while those who own are not subject to the same increased inflationary factors.

The Consumer Financial Protection Bureau announced on Wednesday a proposal to delay the effective date of the Integrated Disclosure rule until Oct. 1. “We made this decision to correct an administrative error that we just discovered in meeting the requirements under federal law, which would have delayed the effective date of the rule by two weeks,” said CFPB Director Richard Cordray. “We further believe that the additional time included in the proposed effective date would better accommodate the interests of the many consumers and providers whose families will be busy with the transition to the new school year at that time,” added Cordray. The required loan documentation consists of two new forms: the Loan Estimate and the Closing Disclosure to ensure compliance. It was originally set to go into effect on Aug. 1. These new forms consolidate the present forms and are meant to give consumers more time to review the total costs of their home loan. The Loan Estimate is due to consumers three days after they apply for a loan and the Closing Disclosure is due to the consumer three days before closing. The public will have an opportunity to comment on this proposal and a final decision is expected shortly thereafter. Source: DSNews

 With interest rates and home prices expected to climb in the next year, the financial penalties of delaying or forgoing a home purchase in today’s market have become very steep, according reports released by “Current market conditions give buyers the opportunity to build substantial wealth in the long-term, compared with renters and later buyers, in advance of the projected increase in interest rates and continuing price appreciation,” said Jonathan Smoke, chief economist for “The problem is inventory is low, which has many would-be home buyers –especially first timers – standing on the sidelines and missing out on potentially material financial gains.” Nationally, the estimated wealth an average buyer would accumulate over a 30-year period based on today’s dollars totals $217,726. Although some markets are more buyer-friendly than others, national data shows homeowners see significant financial benefits as compared to lifetime renters. In 88 percent of MSAs, buying a home produces a financial benefit of at least $100,000 over 30 years. Source: HousingWire