Well, first off, I bet your wondering why I would be writing about Wal-Mart in a real estate blog….right? I guess you first have to understand Wal-Mart’s role in our economy. Regardless if you agree or disagree with the Wal-Mart philosophy, the reality is, Wal-Mart has a unique ability to predict cost and peer into the future because of their role as the nation’s …..hell, the world’s largest retailer. Without sounding too nerdy let me break down like this.
Wal-Mart can predict cost because they make huge purchases. If those purchases are costing Wal-Mart more and more, they have to push that cost to the end consumer, you and I. It really is that smiple.
So, knowing how this works, when Bill Simon, President and CEO of Wal-Mart predicts that inflation is “going to be serious” in a recent meeting with USA Today, you really should listen.
Ultimately, no one can really predict inflation with any proven accuracy but, what we can do is compare the current cost of commodities and goods with previous cost and determine a rate of increase. For example, strictly hypothetically speaking, if every Monday I buy 5 bundles of cotton, because I am in the business of making t-shirts and my cost for the past 30 purchases has been $5.00 a bundle, my regular purchase cost would be $25.00 a week.
Now, let’s say I am putting my order in for this weeks cotton purchase of 5 bundles and I notice the cost has gone up to $6.00 a bundle, that’s a 20% increase. Granted, that’s a bit dramatic but, that is a perfect example of hyperinflation. You see, the supplier had to up his fee because the farmer had to up his fee and that was because fertilizer went up, seed went up, cost went up and cost went up primarily because of fuel cost. Or better yet, the value of the dollar dropped and that $1.00 bought less but, the farmer still needed the same amount of supplies. In other words, demand didn’t change but, cost went up, dollar value fell and I saw an increase of 20% over one week.
Guess what I am going to do….I can’t eat that cost so, I have to increase the retail sales price of my t-shirts to 20% or, maybe I increase it 30% because I know that the dollar isn’t getting stronger, gas isn’t getting cheaper and tension in the Middle East, isn’t getting better, the Governments taxing more to cover their losses, the Fed isn’t putting into place policies that make it easier for me to make money, in fact the EPA has stepped in and said cotton has to be grown a specific way which causes the farmer to incur more cost, etc….etc…..etc……
Are you getting the picture? I hope so because now let’s talk about how this effects the housing industry. When John Smith home buyer wants to buy a home, he has to sit down and determine how much he can afford. Part of this determination is something called, Debt to Income. He has to determine if at the end of the Month, he still has enough money to live on and pay his mortgage. Well, if prices keep rising and, no one really knows by how much however, he sees all the uncertainty in the world that I described above, not to mention, he knows last week when he filled his tank it was only 2.59 a gallon but this week it was 2.86 a gallon, what does he do? He starts looking at a smaller house with a smaller monthly mortgage or, maybe he doesn’t look at all. Let’s not forget, the Fed isn’t making getting a home loan easier, credit is tightening, high housing inventories already exist, prices are falling almost everywhere yet, John Smith can’t or won’t buy a home because, he isn’t sure how much that home is going to be worth in 3 months.
All said and done, if Wal-Mart is warning the us that they are seeing steep, fast increases in prices of commodities and everyday goods, that leads them to believe we are starting to see the beginning of hyper-inflation….or inflation at the least. If Wal-Mart sees it coming……….the stock market is warning of it…….energy prices aren’t dropping………Middle East is on fire and looking to cool down any time soon…….the Government seems to be making things worse with out of control spending………the Federal Reserve is printing Benjamins like no tomorrow………the Dollar is loosing value……..demand isn’t slowing…………it’s a perfect storm against a housing recovery.