Lake Mary First Time Home Buyers… perk up.  We all know what inflation is and the ugliness that can go with it.  Most of us know that deflation is the opposite of inflation…. but don;t know much more than that.

In fact, business TV and newspapers have inflated deflation [sorry for the play on words... but I like doin' that] as a hot topic this week and, since Monday, Google has tracked 13,000 mentions of it.  Make this 13001.

Deflation is a recurring cycle in which the prices of goods and services fall.  Suh-weet… falling prices that is so cool, right?  Well, um, not really.  Why?  Human nature.

When prices are declining  across many industries at the same time, IT CAN SHUT DOWN THE ECONOMY!

If you think about it, is rather obvious why falling prices shut down the economy.  Well, maybe not super obvious because as I type this, the first thing that came to mind was not the REAL reason it does.  Anyway, here it goes.

Rather than buy things on the cheap, people stop buying anything at all. And why would they? The same items will cost less tomorrow than it does today in a deflationary environment.

And this is the problem with deflation — it stops folks from spending and consumer spending is about 2/3  of the U.S. economy. When it stops, the spiral begins

1. People stop spending, which leads to…
2. Layoffs of the workforce, which leads to…
3. Less consumer spending, which leads to…
4. Dwindling corporate revenues, which leads to…

And the spiral continues.

Deflation can be much more insidious that its expansionary counterpart — inflation. Inflation is when the prices generally rise over time and it’s an economic condition through which governments can comfortably navigate. Deflation, on the other hand, is more rare and, therefore, fewer practical control measures exist.

Whether the U.S. economy will slip into deflation is a matter of debate, but if you look more closely, at least with Lake Mary real estate, isn’t that what has been happening here in the local Orlando real estate market?  I talk to many prospective buyers that have been sitting on the sidelines, because of that same reason. ‘it will be cheaper tomorrow.’

The Fed has cut the Fed Funds Rate to promote economic growth and those changes can take up to 12 months to work their way through the economy. Deflationary pressures we’re seeing today, in other words, may have already been addressed and corrected by Bernanke’s 10 rate cuts in the last 14 months.

Until the market figures it out, though, expect that each mention of deflation will hurt the stock market and help the bond market — including the mortgage-backed variety. This should help lower Lake Mary mortgage rates and make homes more affordable for all sorts on buyers… including the first time home buyer that has been chomping at the bit to get into the market and take advantage of these great deals.  Couple that with the $7500 First Time Home Buyer Tax Credit… and you got some serious buying power.

Word of caution though… FHA loan limits are going down in 2009 and the credit goes away in 2009 as well.  If you have been wondering when the right time to jump in was?  Guess what?  Merry Christmas!  Fill out your application today.

(Image courtesy: The Wall Street Journal)