A Return to Stagflation

by | May 7, 2024

Are We Entering a Return to Stagflation?

1970s America saw the stagflation era, a time of slow economic growth, high unemployment, and high inflation. It was a tough time for Americans.

Back then if you wanted to purchase a house, you’d be charged an interest rate of 12.9%.

The dilemma with stagflation is this: actions intended to help lower inflation often make unemployment worse and bring the entire system down further. It’s a tricky cycle to fall in.

Now, in modern day America, we aren’t currently in a deep stagflation cycle. But the way things are trending is troublesome.

Last month we saw a disappointing report highlighting much slower than expected economic growth, higher than expected inflation data, and a dip in the stock market. We also saw unemployment rise and wage growth slow far below the government’s expectations.

All a familiar combination to the conditions that garnered 1970’s stagflation.

But today I want to discuss one area in particular that is especially troublesome and reminiscent of 1970’s stagflation: the US housing market.


Back in the 70’s inflation was running high. Which led the Federal Reserve to hike interest rates.

This attempt to tame inflation increased costs for real estate developers and also drove mortgage rates higher, shrinking the 1970s home buyers purchasing power and ability.

Because of this, the housing market grew stagnant. Homes were hard to afford at a 12.9% interest rate. And because of the increased borrowing costs for developers, fewer homes were being developed.

There simply wasn’t enough supply, and the high interest rates made the existing supply unaffordable.

Sounds a bit like today, doesn’t it?

A lack of inventory was already a problem that existed prior to the COVID pandemic. We saw a decade of under-building after developers went belly up and got scared during the great recession (2007-2009) and we saw interest rates fall to record lows.

Then suddenly COVID hit and buyers jumped into the housing market in swarms. There wasn’t enough supply for the level of demand which resulted in bidding wars, desperate deals being made, and buyers doing anything to make sellers happy to get the deal to close faster so that hopefully their offer would be the one to get picked.

We saw buyers foregoing inspections, making ridiculous offers over asking price, a plethora of all cash deals over asking price, you name it, we saw it in 2020 and 2021. 

Home prices climbed to record highs in many markets and some homeowners decided to sell out and take advantage of the huge profit they were making on the sale of their home. But they too found themselves in the midst of an affordable housing crisis after selling their homes.

Other homeowners battened down the hatches, stayed in their homes and refinanced while rates were low.

Then builders found themselves in an opportunistic position. Existing home sales weren’t enough to keep up with demand. So, it was time to build new homes and buyers were willing to pay whatever price the builders demanded.

Housing Today

Now today we find ourselves in a tricky situation. In March, roughly ⅓  of the current housing inventory on the market was new construction. That’s leaps and bounds higher than the 12% average historically.

In March, there were 970,000 existing single family homes for sale and approximately 477,000 brand new single family homes.

But even with all that building we saw during and post COVID, inventory is incredibly tight.

The US housing market is sitting in a deficit. Realtor.com found that the US is still short 6.5 million single family homes compared to the number of families currently starting new households.

So even after all that, we still find ourselves in an affordable housing crisis.

Housing accounts for a third of the overall inflation reading. And data from this March illustrates that across the US home prices have climbed another 5.7% since March of last year. Now that’s just ludicrous in an economy like this.

And if we compare that to one year prior (March of 2023) we saw an increase of 8%. Which paints a scary picture for US homebuyers.

We find ourselves in a time reminiscent of the 1970’s stagflation cycle. Although the conditions are not exactly the same and times have changed, we are in a rough period, economically, especially for home buyers. And even more so for first time home buyers.

What am I doing about it?

I am legging into a hedge against real estate (short XLRE).

I only have a small position so far and I am still mostly bullish across my portfolio until the market shows otherwise.

But as we get higher, I will likely keep legging into the Real Estate position as the most considerable hedge.

From there, it’s just keeping an eye on the same signs we talked about in today’s letter.

In my opinion, this is a “melt up” scenario where the higher we go, the quicker and larger the correction will be… Whether that is this year, or 2025 — or even later — remains to be seen. Remember, Michael Burry started shorting in 2005 based on the underlying data and had to wait 3 years for the position to work!

To your success,

— Nate Tucci

P.S. Since I first mentioned my SCCO recommendation, it is up 43% on the underlying stock! Not including the dividend yield I have received on top.

Make sure you attend my Ultimate Dividend Portfolio workshop here if you’ve not yet leveraged the power of dividends in your portfolio and as I share about 8 more tickers to consider during the presentation.

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