This week I was showing multi-unit investment homes to an elderly client, a keen investor who was active through the 1970’s energy crisis. I had to ask him about his expectations for the future, now that we are in a full-blown energy/economic war in the Middle East. In the 1970’s I was just a young kid and blissfully unaware of the 1973 OPEC oil embargo crisis, beyond noticing the long lines at the gas pumps. OPEC countries initiated the embargo based on the US re-supplying Isreal with arms during the Yon Kippur War.
My client told me, “I bought a house in Mill Valley. Three years later it had gone up 500%!” He is expecting hyper-inflation again this time around, based on the worst energy crisis we’ve seen in our lifetimes: up until now.
Personally, I think my client was exaggerating a bit, although when I asked Google about the 1970’s energy crisis the response was that oil shockingly went from $3 a barrel to $12! As a result, everything went up in price, hitting the essentials like food and shelter especially hard. It only makes sense, when the cost of inputs go up, the finished product prices also rise. In turn, wages need to rise, which leads to further cost increases and spiraling inflation. The economy stagnates because wages don’t keep up with the increasing cost of living and people can afford less. Stagflation and a world-wide recession are real possibilities moving forward.
What does this mean for the housing market? In 1970 the average price of a home was $23,400. By 1980 it has nearly tripled to $64,600! I’m not saying inflation will happen again on that scale, but it very well could. Mortgage interest rates also rose through the 1970s from around 7% to more than 13% by 1980. Similar to the past, this time around in order to fight inflation, the Fed may need to raise the prime lending rate, which will reinforce the stagnating economy.
I don’t want to be writing about any of this. I don’t want to be thinking about it. What’s worse is the human toll the war has taken, the innocent civilians injured and killed, the 3+ million of people in the Middle East displaced and bombed out of their cities and lives. A worldwide food crisis is a real possibility with 1/3 of the world’s fertilizers not getting through the Strait of Hormuz. Countries like Japan, India, South Korea, Australia and the Philippines get all their oil through the Strait, and their energy prices are rising even rapidly than here in the US. They didn’t ask for this, and they’ve become collateral damage in the war. Meanwhile, the biggest buyer of Iranian oil, China, is getting a free pass through the Strait.
I’m anti-war. All wars are bad. War is evil. This war has escalated and even as I write this conditions continue to worsen as another round of thousands of more marines is enroute to the Middle East. The pentagon has asked for $200 billion more to fight the war. We aren’t coming out of the hole we’ve dug, it’s only getting deeper.