Recent estimates are that 25 million people are being infected with Covid per day in China. This is predicted to last for a few months. Although the connection to real estate in Silicon Valley is not direct and immediate, there is an impact. Interest rates have been driven higher by the Federal Reserve Bank to bring inflation down. Inflation is directly related to high demand and low supply. Many of the items we buy are made in China. China has lifted its zero Covid policy for now, which had closed factories. Many of the Chinese factories will be closed for Chinese New Year: Jan 14 – Jan 29, so increases in supplies will not be immediate. If the Chinese government policy does not re-close the factories, the supply side of many items should be improved.
However several of the key elements with high inflation; food and housing, are not made in China. The Chinese policies are not the main cause of inflation. Although U.S. food processing plants have been shut down from time to time due to Covid Infections, there are no widespread shutdowns currently reported. Food prices are affected by weather and by oil prices (which have dropped but are still high).
Housing construction is dramatically affected by interest rates. With high-interest rates, it is hard for builders to create construction plans that will be profitable. The supply of new housing is unlikely to increase significantly. Our own experience is that the hotel which was planned to be built next door to JLee Realty, and had been worked on for 4 years, including the demolition of a restaurant, was recently abandoned and the now vacant property, has been listed for sale.
President Carter took office in 1977, during a time of high inflation and high unemployment (stagflation). The federal government’s policy grew to fight inflation by increasing interest rates. Federal Reserve chairman Paul Volcker sharply increased interest rates from 1979 to 1983. Volcker is often credited with having stopped the inflationary side of stagflation, but the American economy dipped into recession. Ronald Reagan defeated Jimmy Carter’s reelection attempt in an “electoral landslide” and took office in 1981.
History suggests that, although reopening Chinese factories may improve the supply of many items, the Federal Reserve will maintain high-interest rates to fight inflation measured by housing and food prices, with potentially minimal success due to the negative impact on housing construction and little impact on oil prices. Will Joe Biden be a one-term president as was Jimmy Carter, and a new administration then change policies that directly impact housing?