To Pay or Not To Pay? That is the Question (6 min read)
Chicken wings up 26%, used cars 25%, housing prices are up as much as 20%, and now six figure salaries for Escrow Officers? What is happening out there? Surely we have all faced sticker shock over the last year as we have seen inflation rates of 7% or more, the highest in nearly 40 years. Many young folks are seeing empty grocery shelves for the first time in their lives, which can be unsettling. After all, this is the land of plenty, right? Houses are selling like hotcakes with historically low inventory and the stock market is the midst of an adjustment, certainly not helped by logistical backups which inhibited the construction industry most of last year and into today. Car dealerships are contacting recent sales from the last few years attempting to buy back used cars as demand rises and supply dwindles. There are lines wrapping around the figurative block for computer processors as a global shortage compiled with cryptocurrency mining place higher demand on the CPU supply chain. Companies and consumers alike look to their balance sheets as hard decisions must be made and these new prices stretch budgets. If business is booming and a new employee is needed to service that business, is it worth paying what seems like a crazy high offer?
Are these trends soon to be reversed as the country and world get back to the old ways after a global pandemic, or have things fundamental changed and values permanently shifted?
The Great Recession burned itself into the minds of most that lived through it. It seems all too plausible that few lessons were learned, and that we could be back in the same spot. So, when trying to evaluate this current market, many folks are haunted by past experiences. As the reader may know, the housing market represents up to 18% of the U.S. GDP and as housing goes, so typically goes the economy. However, the current surge in housing prices seem to be made of sturdier fare. The Great Recession enveloped the world largely resulting from irresponsible lending, corrupt regulating, and risk management that was misunderstood or criminally ignored.
Most of these issues have been addressed via regulation such as the Dodd-Frank Act and thus, subsequent mortgages are far less risky. But still, large portions of the populace are watching housing prices soar, plugging their ears, and hoarding their gold expecting to hear a POP! This feeling of impending doom can be appreciated given all the turmoil of the last few years though is presumably unwarranted.
A more likely culprit to finger for the current housing market hysteria is the same global force that has upended so many other aspects of life over the last two years, Covid-19. The United States of America in 2020, spurred on by prospects of a global pandemic, attempted to spend and stimulate us all out of peril. More or less, the wheels of our economy had ground to a halt and spending was largely the strategy. Regardless of one’s opinion on the merits of this shut down and spend, it occurred and the repercussions of that grand economic experiment are still rippling around the world. In fact, firing the “machine” back up has spurred numerous consequences across many industries and sectors.
With the global and American economy essentially stymied, Americans largely sat at home wiping off their takeout containers with bleach and ordering imported goods on Amazon. The result of which produced a huge wave of consumer spending. Spending that when combined with limited workers at ports (and other logistical choke points) caused global product shortages. Along with hamstrung processing plants of all kinds, due to safety or sickness, supply was even further reduced helping to raise prices, essentially creating a classic Adam Smith supply and demand economics 101 case study. The housing market faced its own immense pressures as companies and office workers were forced to move toward remote working models. People started migrating out of dense urban centers looking for single family homes around the periphery, spiking the demand for homes and thus again prices. With this surge and historically low interest rates (and extended refinance boom) came a booming settlement industry as everyone struggled to keep up (we are sure many of you noticed) and thus six-figure Escrow Officer offers abound. We traveled a long way to tie it all together, but you get the point!
Upon further investigation, if the booming housing market does not appear to be a bubble circa 2008-2009, and instead a response to a fundamental shift in housing needs, are the high wages associated with the current employment environment here to stay as well?
As highlighted in a Feb 5th Economist article, it seems the Federal Reserve has painted itself into a corner with interest rates as close to zero as possible with only one way to go; up. America has spent the last several years in an era of extremely cheap money. In the 1990’s every G7 economy had rates over 5%. In 2021 not one of these nations featured interest rates over 2.5%.
The markets are being reassured against drastic moves, though many believe significant rate hikes are inevitable. Adjusting rates has always been the go-to tool for reigning in or boosting the economy. Moreover, with the markets now accustomed to essentially free borrowing, the mere thought of slightly increased rates can cause dissent in the ranks. However, delaying rate hikes only increases the likelihood of those increases needing to be increased to still larger…well…increases.
As the faucet of affordable cash is slowed, perhaps there will be a positive response with housing prices stabilizing (and returning to somewhat lower levels). Combine that with an end to pandemic induced logistical issues, and it should help relieve some degree of inflationary concerns. The housing market, however, will likely experience longer term effects from the pandemic. Businesses and workers alike have adjusted to the flexibility of remote work. Expensive office space has been eschewed by many corporations, opting for smaller or shared spaces. Workers can avoid commutes altogether with remote work opportunities and increase their potential living radius to offices with only occasional commutes. This swing from densely compacted cities to single family offices in more rural locales mean the demand and supply of housing could remain uncharacteristic. As outlined recently in The Title Report, even with slight rate hikes, we should continue to see somewhat consistent housing prices as the market remains strong.
What is likely to occur and already has with higher rates is a decrease in refinances. This decrease may relieve pressure in some departments as personnel can be shifted around accordingly, thus potentially reigning in the top end compensation figures. However, national wages were increasing in 2021, faster than they had at any time in the last two decades and it appears we are keeping that pace.
Thus, there may be a spiral effect between wage growth and inflation. Companies raise prices to account for higher labor salaries, which are demanded due to higher cost of living, rinse and repeat. Within the settlement services industry (as the housing market remains booming) if you want to service the increased business, you may have to shell out higher offers to strike while the iron is hot. Many a jaw has dropped at the idea of a six-figure Escrow Officer offer only to be lifted back up and formed into a frown as another month or two passed with no other, more affordable, options. How this will be affected by any great changes in the housing market or wider economy is anyone’s guess. Our advice for now, be prepared to train fresh recruits, ready to roll in three to six months, and work toward locating experienced talent now, by any means necessary.