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HOME-MORTGAGE LENDING ACROSS U.S. FALLS TO MORE THAN 20-YEAR LOW IN FIRST QUARTER

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Total Residential Loans Drop Another 19 Percent Quarterly to Lowest Point Since 2000;Refinance and Purchase Lending Decline Nearly 20 Percent Quarterly, With Refinancing Down 85 Percent Annually;Home-Equity Lending Decreases for Second Straight Quarter ATTOM, a leading curator of land, property, and real estate data, released its first-quarter 2023 U.S. Residential Property Mortgage Origination Report, which shows that just 1.25 million mortgages secured by residential property (1 to 4 units) were originated in the first quarter of 2023 in the United States – the lowest point since late-2000. That figure was down 19 percent from the fourth quarter of 2022, marking the eighth quarterly decrease in a row. It also was down 56 percent from the first quarter of 2022 and 70 percent from a peak reached in the first quarter of 2021.          The ongoing sharp decline in residential lending resulted from another round of downturns in both refinance and purchase loan activity as well as the second straight quarterly drop-off in home-equity lending. Lending activity contracted again as a slowdown in the 11-year U.S. housing market that started in the middle of last year stretched into 2023 amid elevated mortgage rates, consumer price inflation and other signs of economic uncertainty. During a period when average interest rates remained double what they were a year earlier, lenders issued just $388 billion worth of residential mortgages in the first quarter of 2023. That was down quarterly by 20 percent and annually by 58 percent. The overall activity included 595,253 loans granted to home purchasers in the first quarter of 2023, down 19 percent from the fourth quarter of 2022 and 44 percent from the first quarter of 2022 to the lowest point since early 2014. The dollar volume of purchase mortgages dropped 18 percent quarterly and 45 percent annually, to $216 billion. On the refinance side, only 407,956 mortgages were rolled over into new ones – the smallest amount this century. That was down 18 percent quarterly, 73 percent annually and 85 percent from the first quarter of 2021. The value of refinance packages was down 21 percent from the prior quarter and 74 percent annually, to $127 billion. Home-equity lending also went down, dropping 23 percent in the first few months of 2023, to a total of 245,071. The decline marked the second quarterly decrease following a year and a half of gains. While lending activity kept declining across the board in early 2023, the portion represented by different kinds of home loans held steady. Purchase loans continued to comprise about half of all mortgages issued in the first quarter of 2023, with refinance packages making up a third and home-equity loans 20 percent. But that remained a sea of change from two years ago, when refinance deals made up two-thirds of all activity and purchase loans just one-third. “Lenders saw opportunities dwindle even more during the first quarter as the longest slowdown in mortgage activity in at least 20 years continued,” said Rob Barber, chief executive officer at ATTOM. “In one sense, it wasn’t that unusual, given that wintertime is usually the slow time of the year for lenders. But the latest slide extends a run that started two years ago and has carved away nearly three-quarters of the home-mortgage business. Things remain uncertain in the near future, with the potential for interest rates and inflation to go either way, but the Spring buying season will be a key indicator of whether things may turn around.” The across-the-board slump in mortgage activity continues to reflect a combination of economic forces that have helped stall the nation’s decade-long housing market boom and, by extension, damaged the mortgage industry. Those forces include mortgage rates that doubled last year, high consumer price inflation, a historically tight supply of homes for sale and broad economic uncertainty. They have combined to make refinancing or borrowing against home equity far less attractive, while also raising the cost of buying a home and limiting purchases. Total lending activity off 70 percent in just two yearsBanks and other lenders issued a total of 1,248,280 residential mortgages in the first quarter of 2023 – the smallest number since the fourth quarter of 2000. The latest figure was down 19.4 percent from 1,548,372 in the fourth quarter of 2022, 55.6 percent from 2,810,051 in the first quarter of 2022 and 70 percent from the most recent high point of 4,154,015 hit in early 2021. The eighth consecutive decrease extended the longest run of declines this century, while the annual downturn marked the largest since at least 2001. A total of $387.8 billion was lent in the first quarter, which was down 19.8 percent from $483.7 billion in the prior quarter and 58 percent lower than $923.8 billion in the first quarter of 2022. Overall lending activity decreased from the fourth quarter of 2022 to the first quarter of 2023 in 167, or 97 percent, of the 173 metropolitan statistical areas around the U.S. with a population of 200,000 or more and at least 1,000 total residential mortgages issued in the first quarter. It was down annually in every one of those metro areas. Total lending activity dropped at least 15 percent quarterly in 109 of the metros with enough data to analyze (63 percent). The largest quarterly decreases were in Buffalo, NY (total lending down 47.6 percent from the fourth quarter of 2022 to the first quarter of 2023); Albany, NY (down 46.4 percent); Toledo, OH (down 43.5 percent); Knoxville, TN (down 42.7 percent) and St. Louis, MO (down 39.1 percent). Aside from Buffalo and St. Louis, metro areas with a population of least 1 million that had the biggest decreases in total loans from the fourth quarter of 2022 to the first quarter of 2023 were Rochester, NY (down 34.7 percent); Minneapolis, MN (down 34.1 percent) and Indianapolis, IN (down 32.5 percent). No metro areas with a population of at least 1 million saw total lending rise during from the fourth quarter of 2022 to the first quarter of 2023. Smaller metro areas where lending did increase quarterly included Fort Myers FL (up 27.8 percent); Lakeland, FL (up 21 percent); Sarasota-Bradenton, FL (up 6.6 percent); Augusta, GA (up 6.1 percent) and Montgomery, AL (up 1.6 percent). Refinance mortgage originations hit another

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Philadelphia, Pennsylvania

The City of Brotherly Love Faces an “Uncomfortable” 2023 Market By Carole VanSickle Ellis When a national expert like Moody’s Analytics chief economist Mark Zandi starts your market’s year off with the observation, “We’re in the bad times,” a lot of local homebuyers get chills — and not in a good way. For real estate investors, however, those chills are something like a silver lining, and Zandi only increased investor interest in the Philadelphia area when he continued his February analysis of that market by predicting that agents, first-time homebuyers, and single-family homebuilders will not feel “all that good” in Philadelphia this year. “In 2022, potential buyers were desperate for more inventory,” recalled Axios Philadelphia analyst Mike D’Onofrio. He added, “Now, homes are hitting the market but people cannot afford them.” D’Onofrio blamed rising interest rates and a localized affordable housing crisis driving rents skyward for Philly’s looming real estate slump. Since he published this analysis in late February of this year, new data shows that median selling prices have fallen by just under 4% year-over-year at the end of Q1 2023; housing inventory on the market is up by roughly 15% year-over-year, and the average time on market is up by more than two weeks year-over-year. Furthermore, at the end of the first quarter of 2023, more than half of all homes on the market in Philadelphia sold below asking price, and most of those transactions took place in what economist Kevin Gillen described as “the lower segment of the market.” For real estate investors seeking metro-area investment opportunities, this confluence of factors could be just what the doctor ordered. With times on market nearing the two-month marker, Philadelphia sellers may feel more inclined to explore less conventional sales options in order to get deals done. As more and more homebuyers find they are no longer able to afford as much house or, in many cases, any house at all thanks to rising interest and rental rates that effectively diminish down payment savings while hiking monthly mortgage payments, the appeal of creative financing will also be on the rise. For Bright MLS chief economist Lisa Sturtevant, 2023 in Philadelphia appears likely to be “about resetting what normal looks like,” including accepting 6% interest rates as something less than cataclysmic. “The market is contracting on both sides,” Sturtevant explained. “[Fewer buyers and sellers in the market] makes for high competition within the market.” She went on to predict “the largest price correction will happen within the city” while “’second-tier’ suburbs may see a decline year-over-year in home prices [and] top-tier suburbs…continue to do well.” Darkening Clouds on the Horizon … Maybe For retail buyers in the Philadelphia area, things are looking bleak this spring, with Zandi describing the local market as being “about as weak as it gets” in May. He continued, “It is kind of consistent with the worst of sales during the peak of the pandemic when we were all shut in, or go back to the financial crisis in 08/09. It is those kinds of levels.” The issue is a troubling combination of rising interest rates and an ongoing affordability problem that local analysts say is “stifling” the market. For individual real estate investors, this could lead to some difficulty finding homeowners willing to sell at any price point — much less at a discount — but desperate buyers in the area are likely to continue to push prices upward on available inventory. For investors with access to viable deals, this will mean their properties are more in demand than ever if the current climate persists. However, it will be important to prioritize reaching potential buyers as well, since the Bright MLS Home Demand Index published in April indicates that many are giving up on the market and seeking other options. The report indicated that demand for luxury condos was the strongest this spring, followed by townhouses and single-family homes priced below $300,000. Luxury single-family homes trailed far behind the rest of the field with the lowest levels of demand. Researchers noted at time of publication that there was a 5.5-month supply of luxury condominium residences on the market and 1.4 months’ worth of mid-market single-family homes. Rising activity from institutional homebuyers in the area may also affect future inventory and demand for homes for sale instead of rent. According to reports from housing advocacy group The Reinvestment Fund (RF), roughly 20% of homes in “distressed” neighborhoods in Philadelphia are currently being sold to institutional investors and converted to rental properties. The fund’s research team defines “distressed” as areas in which there are below-average homeownership, “where both prospective buyers and current owners have struggled to access mortgage financing, [and]… in neighborhoods with low sale prices and high vacancy.” Although institutional activity can be a good thing for neighborhoods where properties are stagnating and for long periods of time and also may ultimately create more housing opportunities for residents in a market, institutional investor participation in a market raises the stakes for individual investors also working to acquire these properties in order to flip to retail buyers or rent. Zillow’s research team recently ranked the Philadelphia housing market 10th in the country for “hottest housing markets of 2023.” In that report, Zillow economic data analyst Anushna Prakash observed, “This year’s hottest markets will feel much chillier than they did a year ago,” adding, “The desire to move has not changed, but both buyers and sellers are frozen in place by higher mortgage rates, slowing the housing market to a crawl.” Zillow placed Philadelphia in tenth place behind southeastern cities like Charlotte, Nashville, Jacksonville, Miami, and Atlanta, as well as a few midwestern markets. No city west of Dallas, Texas, appeared on the list at all. In response to the ranking, local realtor Larry Flick, CEO of Berkshire Hathaway HomeServices Fox & Roach, Realtors, predicted that home prices would “remain stable” and “affordability will increase” over the course of 2023. So far, home prices have actually continued to

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Constructive Capital

Putting Client Success First By Carole VanSickle Ellis “There are three things in life you can count on,” Alex Offutt, managing director of the Wholesale and Correspondent Division of Constructive Capital, likes to say, “death, taxes and Constructive.” When Ben Fertig, founder and president of Constructive Capital (known as Constructive Loans prior to January 2022), started the company in 2017, he knew he wanted to bring flexibility with stability to the private lending sector. “We start with client success first and work backward,” Fertig explained, adding, “We are a business that outperforms in difficult market conditions. There is a differentiator when markets are challenging, and that is when Constructive stands out.” Early on, Fertig identified four components of client success that a lender must meet in order to actively advance a client’s ability to transact deals. “From the beginning, we concentrated on speed, flexibility, price and reliability,” he said. “Our decision to put client success first and work backward affects our processes, policies, and the decisions we make on personnel.” Fertig cited Constructive’s decision to diversify across capital sources, product offerings, and distribution channels in 2021 as an example of the results of prioritizing client success over internal milestones. In April of that year, Constructive finalized a deal to bring in a new source of capital: direct life insurance money. Life insurance policies last for a specific period of time, usually between 10 and 30 years, and pay out upon death only if the policy is active. Life insurance companies, like most life insurance providers, generate revenue through premiums charged on policies and by investing a predetermined portion of those premiums into reliable, low-risk assets. Not surprisingly, real estate-based assets and loans are precisely the type of low-risk asset insurance companies find appealing. The surprising thing in 2021 was that very few of these insurance companies were investing with capital providers like Constructive. It only took Constructive four months of its diversification focus (diversification was “the word for 2021” according to Fertig) to identify and bring life insurance money into the equation for the fund. “When the market started to have liquidity problems in Q2 2022 and rates started shooting up like a rocket, we were able to use our relationships in the insurance industry to lock in money for about 60 days at a time,” Fertig explained. This meant that Constructive was passing along locked-in prices with roughly two-month windows at a time when much of the rest of the industry was dealing with rampant volatility. “There were periods when some of our competitors were changing pricing by 250-300 basis points at a time, whereas we were able to maintain steadier prices because our money was locked in,” Offutt recalled. He said the company also elected to pass the low prices it had been able to maintain thanks to diversification on to clients, which paid off in the form of customer loyalty in 2022 and beyond. “That decision [to bring in that capital] was huge for us because we were able to help our clients, many of whom are brokers themselves, access attractively priced capital for their borrowers,” Fertig explained. “It gave us a lot of traction and a reputation for doing what we say we will do, being stable and reliable, and remaining a good partner when things [in the market] get difficult.” Standing Strong Through Thick & Thin Offutt, who joined Constructive Capital just days after Fertig opened the doors, recalled early discussions between the two when they envisioned creating a business-purpose loan provider dedicated to “bringing source capital to the average small broker or private lender.” He explained, “We built our model on transparency, efficiency, and scalability, with the goal of executing on a loan better than anyone else out there. That is what defines us.” Fewer than five years after its founding, Constructive Capital snagged a referral from Scotsman Guide in its residential directory and what was, at that time, referred to as the “hard money” category, which included lenders offering “fast closings and short loan terms…based on unencumbered property value,” according to the July 2022 issue of the leading lending-resource platform’s Residential Edition. (Today, the hard-money nomenclature has been replaced with the term “private money lender”). “We have worked hard to try to become the strongest and most consistent capital provider in the industry,” Fertig said. “Today, when this business is tougher than ever due to the difficult market environment, tight liquidity, and higher rates, it can be hard to get started. We are on the side of the smaller broker or lender who wants to take advantage of the stability we provide.” Offutt chimed in, “If a lender is doing between one and five loans a month, we want to help them get to 20 or 30.” During the early days of the COVID-19 global pandemic, Constructive Capital, like many lenders, was placed in a quandary over whether or not to continue originating new loans in a truly unprecedented financial environment rife with unexpected and often non-negotiable regulations that were, in some cases, passed nearly overnight without oversight or public discourse. Although the company did elect to implement some extremely stringent origination guidelines, it refused to shut its doors completely. “The liability of not making those loans [when investors needed them] was greater than the liability of making them,” Offutt explained, “and in cases where we did have to pull back on planned origination activity, we paid the broker fees and earnest money on those loans anyway because it just felt wrong not to. We wanted people to know that we had not abandoned them; we were still there.” Those payouts, which included a winnings payment for a broker contest in March 2020 that ultimately was unable to move forward due to pandemic-related complications, totaled more than half a million dollars. Money was tight for a while, but Constructive stood firm. “When the market came back, our people remembered what we did,” Fertig said proudly. “They know they can count on us

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2023 Midyear Update

Squid Games and Green Shoots for Private Lending By Eric Abramovich The private lending industry emerged from 2022 battered but hopeful. At the halfway mark of 2023, we are really starting to feel the repercussions of Fed policy slamming the brakes on the economy. Just like the anti-lock braking mechanism of modern cars, where pressure is released and reapplied in a pumping fashion in order to stabilize the stop, the Fed is doing its best to slow the economy down without grinding activity to a halt. That said, the Fed has caused Wall Street to sneeze, and the private lending industry has definitely caught a cold. While there are signs of thawing with green shoots sprouting if we just look, it feels like we keep reemerging from the last round of squid games only to find that there’s another round left before we reach safety. As we look back at the carnage and the challenges ahead, we also wonder how long the malaise might last. Unlike the consumer mortgage space, which is having its own severe challenges in this environment, our nascent private lending industry has an even worse liquidity profile because it isn’t backed by the government agencies Fannie and Freddie. The institutional capital that came in gradually from 2013 and then quickly during the pandemic has rapidly retreated, creating a world of winners and losers — those with capital to lend and those without. Encouragingly, securitization markets seem to function at the right price, but a public RTL (aka fix/flip) deal hasn’t closed since January, mainly because the pricing offered is too high for private lender and borrower tastes. In stark contrast to the times when every lender had more capital than deals, the liquidity has now congregated around a few national lenders backed by well-capitalized insurance companies and less-leverage-reliant asset managers hungry to own the space. This has created a multi-polar world of sorts, where those not aligned to a strong pole are facing existential crises. The survivors are getting stronger even in the face of declining borrower transaction volume, buoyed by less intense competition from the fallout of their misaligned competitor lenders. But even for those aligned to the seemingly strong poles today, safety in the next round of private lender squid games is far from guaranteed. The Next Domino to Fall The banking crisis was the next domino to fall, and so far, the fallout and readthrough to our industry have been muted, with both risks and opportunities emerging. A year ago, some in the private lending industry all but dreamed of being acquired by a bank — with cheap permanent capital coming from stable deposits. The regional banks have also been providing much-needed liquidity in the form of warehouse lines to local and national lenders. The previously unthinkable bank runs are causing severe pain for those exposed, but for those aligned to the right poles, the retreat of banks is bringing back bankable real estate investors as borrowers. Further scarcity of capital has brought pricing rationality back to markets like California, where there was an almost perpetual bid on below-market-rate borrower loans. Table funders are reveling in providing liquidity to smaller lenders whose warehouse lines are constrained. It has been a mixed bag so far, but as if the banking crisis and the potential contagion aren’t bad enough, there is potentially an even more sinister evil spirit lurking in the background, which could be the next round — the ‘commercial real estate (CRE) bomb.’ While our discussion here is focused on private lenders that lend to residential real estate investors, with the impending maturity wall of loans against CRE quickly approaching, rates up dramatically, liquidity already scarce, and subsectors such as office and retail obliterated by pandemic trends — we need to stay cautious. Residential housing is showing very strong signs of resilience and holding its ground as an attractive investment, and while the negative perception seems contained to CRE, the fallout can lead to a vacuum where the relative value effect causes institutional capital to gravitate toward the most attractive opportunities. That is, an institutional investor might favor allocating capital toward deeply discounted distressed CRE assets versus residential assets that have barely budged from their valuation high-water marks. Are We Approaching the Last Round? It’s always difficult to call a market bottom or an end to a cycle. Surely the banking crisis has put us closer to the end, and usually, government intervention, this time via the FDIC stepping in and guaranteeing deposits, is a strong sign we’re approaching the last round. There are positive signals everywhere. Residential real estate transactions show surges in activity in reaction to slight downticks in mortgage rates, indicating a market buoyed by pent-up demand and lack of supply that is simply weighed down by affordability challenges, not crushed by them. Inflation is retreating, however begrudgingly, and there seems to be more chatter around rates coming down than going up. After a brief dark period for home builders, optimism abounds once again, and sales of new homes have been very strong. Fix/flip profitability signals, calculated as the difference between the buy and sale price on a 12-month hold, are as bad as they’ve been during the Great Financial Crisis — which is interesting as a sensationalist headline, but in reading between the lines, this looks like a bottoming out indicator. Coming into the Spring selling season, there have been sharp rebounds in HPA (Home Price Appreciation) in a lot of markets, and counterintuitively, some markets are now at their all-time highs. The green shoots are definitely sprouting, but only time will tell if this is a dead cat bounce or a trend with real legs. The mixed signals and crosscurrents are strong, but here at Roc360, we take the long view. We have focused on diversity of capital for our lending businesses and have built up an ecosystem for real estate investors. We’ve made sure to broaden our loan products while enhancing our ancillary products and services

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Increasing the Inventory of Affordable Housing

Working Together to Make a Difference By Robert Rakowski HomeVestors®, the “We Buy Ugly Houses®” company, is playing an important role in addressing the housing inventory crunch with the current U.S. housing Inventory at 51% of pre-pandemic levels. This is especially true for first-time buyers. Potential homebuyers are seeing fewer fresh listings as sellers have stepped back even further. In April, new sales listings decreased, defying normal seasonal trends. According to Zillow, total inventory is up just 3% annually and while buyers are still scooping up what they can find, they are hindered by a lack of choices. Massive home price appreciation, combined with mortgage rates that doubled in 2022, has made both down payments and monthly mortgage costs much tougher to afford. Several forecasters expect affordability to improve slightly over the next year, but high demand for homes and stubbornly low supply will prevent a return to pre-pandemic norms.  A report recently released by ServiceLink shows that complicated market conditions are leading some homebuyers to abandon the homebuying process. For example, their study cites that almost half of the respondents surveyed considered buying a new home in the past 12 months, but ultimately decided against it. And over 50% of those respondents said their buying options were too expensive. These percentages are considerably higher than the studies cited in 2022. In real estate, for every action there is always a reaction. When supply is lower, demand is usually driven up; when supply increases prices are likely to lower. As months of supply for existing home sales remain near all-time lows, contributing additional and improved housing inventory enables more low-and-moderate income and first-time homebuyers to access affordable housing. The average sales price for a newly built home has climbed to $543,600, but the average resale price of houses from a “We Buy Ugly Houses” franchisee is around $254,000. At HomeVestors, when independent business owners buy and revitalize houses, they actually increase the inventory of affordable housing. On average it takes less than 120 days for franchises to reintroduce rehabbed houses to their local markets as desirable properties for new buyers. Many of the houses that they buy would not typically qualify for conventional or FHA/VA financing due to their poor condition. The time and work of the franchisees, which includes hiring subcontractors, paying for the subcontractors, buying materials, etc., makes it possible for these houses to qualify for a mortgage. Additionally, they pay all normal closing costs, do not charge real estate commissions, and the sellers don’t have to worry about cleaning and showings. When a franchisee buys a house, closings sometimes occur in as little as three weeks. Their offers are based on the money invested in repairing the property and the money sellers save on associated transactional costs. The independent business owners do more than their We Buy Ugly Houses motto suggests. They also help people with Solutions for Ugly Situations®, be they tax liens, probate, inherited homes, etc. Whatever the situation, issues are navigated face-to-face with the seller and not merely online. Since HomeVestors’ founding, their franchises have purchased over 140,000 homes, the vast majority of which have returned to market as “mortgage-eligible,” via a national network of over 1,100 franchises across the continental United States. However, solving both the housing affordability and inventory issues is an arduous task. And it will take time to fix a situation that has been spiraling out of control for years. The good news is that the HomeVestors independent business owners are some of the best and brightest leaders in the real estate community. By everyone working together, investment companies, lenders, builders, service providers, etc., the inventory crunch and affordable housing crisis can be solved.

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An Economic Reality Check

Now, What Are You Going to do About it? By Phil Mancuso In the thirty-five years I have been in mortgage and real estate, I do not know if I have quite seen anything like the last few years. How does one observe, measure, plan and trade around an entire economy that has been shut down for months, only to see it not fully re-open for well over a year? Then pumping unprecedented sums of currency into the system while continuing to navigate what has been an ever-widening wealth gap, which has only been made worse by said seizure and resuscitation? And once we have endured and accomplished all that, how do we finally expect to safely land that massive, ill-conceived and unwieldy ship? In two words; you don’t. You don’t because the data with which decisions are made is stale and imperfect. You don’t because the numbers and the people interpreting those numbers have never lived through these conditions, nor have they navigated an economy that seemingly becomes obsolete daily thanks to the internet and machines. You don’t because our economic behaviors change daily, swiftly and without warning. You don’t because the Fed knows two speeds; run like hell or smash into a wall at top speed. And lastly, you don’t because the Fed had it right to begin with, inflation was transitory. Our Economic Health In fact, our economic health has been transitory since the 1980s, buoyed by events like stock and housing bubbles, Baby Boomer inheritance bonanzas, intra-year tax cuts, QE-infinity and most recently COVID stimulus checks. Guess what has not nurtured that health? Income. Pull any income chart over the last three decades and you will find it has not moved much, even with the recent boon in wages. So, when that bonus money runs out, so too does prosperity. I have said for several decades that rates are never going up and I’ve yet to be wrong. That bell has now tolled for much of America and the numbers are only starting to show it, but on the streets we can feel it, on Twitter we can see it. You do not have such massive discourse or discontent when all is well. The bond market, which always sees that forest through those trees has been screaming it. Mainly because all the hints have been hidden in plain sight. ISM prices paid peaked in June of 2021, yet CPI only breached a 5 handle last month. In fact, you would have to go back to April 2020 to find a worse level than this past December’s ISM price component. Further, we had two consecutive negative quarters of GDP, which formerly was considered a recession before we redefined the term and we are now predicting, even trending back to that in the second half of this year. Or, maybe it is as simple as the good ole’ eye and smell tests. Malls were packed in the Summer of 2021, yet today they are often found empty. I have asked many retailers, builders, tradesmen and others and they have all said the slowdown is palpable. Never mind asking your friendly neighborhood loan officer. And there is that little thing about bank failures. In fact, three of the four biggest failures on record, and yes that includes the depression and 2008, just happened recently. Everything is fine. Nothing to see here. But what about all these high prices? In a word, scarcity. The Fed is trying to fight demand-pull inflation. That is the inflation that rate hikes can tame. But how do we have demand-pull inflation in the absence of historically normal supply levels? Unpopular opinion: we do not have inflation; we have a goods and services shortage. Monetary policy cannot fix that problem. The million-dollar question is will supply ever return? I have heard arguments from very credible supply chain experts, on both sides. On the not so bright side, one such compelling argument was that the western consumption model is on life support. We are running out of everything and will be forced to live like people in Europe and the farEast with fewer, better, and more expensive things. There will be more customization, smaller closets and homes, steak dinners becoming more the exception for special occasions or for the wealthy. The Near-Term Inflation Outlook There was a time when things were built to last and not cheap and disposable. We have too many people and too few resources. I would imagine shortages also have not been helped by four record years of factory fires and explosions, highlighted by a 129% jump in 2021. What if we go back to one-car households? Smaller houses? Less consumption? We had two TVs in our house growing up and one of those was a small portable TV. Now some houses have a dozen. In fact, my first rear projection TV cost over $5,000 in 1998 dollars. That would buy me ten or more today in 2023 dollars. The good news is we would have a long way to go to return to a high price-low consumption model. So, what if prices do not go down en masse? The worst outcome is stagflation, high prices, bad economy. It is very rare. In fact, it has only happened one time and it was driven by a gas shortage. The good news is prices across many measures are coming down, so that outcome seems unlikely. In fact, if you discount the last year or so of price increases and drill down over a longer-term view, you will find that many if not most household items are actually very cheap using relative dollars, especially electronics. TVs, computers, phones, vacuums, etc. are in fact incredibly cheap adjusted for inflation. My first computer was about $4,000 all in 1980 dollars. Even most cars are relatively cheap. A simple Google search of a 2002 Ford Mustang will tell you the MSRP was $24,390. That same car today is $27,770, not even a 1% annual price increase.

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