A One Two Punch of the Current Recession
Welcome to the new recession. High inflation coupled with a weak housing market are throwing the media into a frenzy of doom saying. Either issue alone would not be that difficult an issue to tackle. However, when combined as they are today, it makes for an especially difficult financial times.
High Inflation Reducing Income
Inflation is here to roost. Every time I fill up my car I feel it. I’ve had to make an adjustment to my monthly budget to account for the sharp increase in prices. I just wasn’t making it on the estimate that I made at the beginning of the year. Granted the increase is only $40 a month, the approximate cost of a tank of gas for my Corolla. One of the benefits to having your finances in order is being able to shrug off periods of high inflation.
We are feeling the same pressure at the grocery store where specific foods have jumped in price. This isn’t as bad as the gas bump. We can always adjust for higher grocery prices by slightly changing our food preferences. However, I feel that a family already close to the edge may already be waiting for the sales and using coupons as a matter of course. The recent increases are just going to make matters worse.
The Housing Bubble Bursts
You’ve read the headlines. You know the story. Houses are in foreclosure left and right. Desperate home owners have their houses languish on the market while buyers sit on the sidelines waiting for the prices to drop even further. Hell, I’m one of them. I’m cheerleading the market to crash deeper. As a potential first time home buyer, times are good.
This was long overdue. There was no way prices could continue to climb the way they did during the boom. Thank goodness, because otherwise, home ownership would become an ever elusive luxury for new members of the middle class. It is high time that prices took a dive.
The One Two Punch
Matters only get worse when the Federal Reserve cuts into interest rates to keep the credit markets functioning. This act feeds into the inflation troubles. We are facing negative real rates on our savings because of the current Fed policy in work.
That isn’t the troubling part of the equation. As I see it, the weak housing market is actually reducing home ownership in this country. A house, if used properly, i.e. not as an ATM using home equity loans and the like, can be the largest and most effective hedge to inflation for a family.
If your expenses in gas and food go up in a given year, it would ultimately be ok if the cost of owning your house stayed the same. Your overall inflation rate will be small because the biggest expense in your budget is fixed. This is exactly what happens when you have a traditional 30 or 15 year fixed home mortgage. You can always get ahead because even today’s high inflation would not overrun the fixed cost of owning your home.
As a percentage of your expenses, a house in going to be at the top of the list. The fact that this cost will never increase is the layman’s protection from inflation. This protection was eroded significantly in the bubble due to the presence of ARMs, home equity loans and other lines of credit. Ever bigger houses became the norm as credit practices became shadier and shadier. Years of poor lending standards have finally reaped what they have sown.
The Solution is Simple, Make More Money
Today is the day to do whatever is required to get a better job and make more money. If you have an extra 3 to 4 hundred dollars every month then chances are you still cringe when you fill up your tank but it doesn’t materially hurt you. You are still going to make all you payments and keep food on the table.
The horrible irony is that the ones who are least able to handle the economic difficulty are always hit the hardest. It is just the way the math comes out no matter what kind of recession we are in.
Advance your education and be ready to jump at an opportunity. If you are in any way struggling as a result of the current market you can’t afford not to be prepared. I wish I had a more concrete answer but when you crunch the numbers, the result is always the same. Cash is king. So get your own crown if you can help it. You can’t afford not to.