I’m sure you’ve all seen the sharp increases in gasoline prices or the price of groceries in the last several months. To many people and especially real estate investors — inflation is often their worst nightmare. Headlines today are blaring about how inflation is at a record high, and how our futures are volatile and unclear.
There’s certainly merit to these claims, and that’s why we’re here. We’re here to offer an objective stance by presenting the facts and numbers. Here is what’s happening with inflation, and how it is going to affect the real estate market!
What The Statistics Say About Inflation
It’s uncontested that inflation is in fact here. In this section, we’ll be examining the recent Consumer Price Index (CPI) inflation report which covers the month of September. From energy to food, prices continue to rise across the board and by a lot. Across the board, prices climbed 5.4 percent year over year.
According to MarcoTrends, this inflation rate is the highest that our economy has experienced since 1990 where the inflation was 6.11 percent.
A large part of this increase can be attributed to the sudden return to normalcy that is happening all over the country. People are returning to restaurants, going on vacations, and choosing to move after being stuck home for the last 18 months. To prove this point, the indexes for food, shelter, and gasoline were the key drivers of inflation growth in September. Over the past year, food prices have become 4.6 percent more expensive and shelter prices have become 3.2 percent more expensive. Gas prices and grocery store prices both increased by 1.2 percent over the past month.
Luckily, a brighter picture is painted when we look at inflation from August to September if we strip out volatile food and energy prices. Between August and September, the overall inflation only rose 0.4 percent — suggesting that inflation is at least slowing down in certain sectors.
Still, our economy is not off the hook yet. Looking at the past 12 months (after stripping out volatile surges), prices climbed 4 percent over the last 12 months. This 4 percent growth is twice as much as the Federal Reserve’s 2 percent inflation target. Even if inflation is not as high as in previous months, it is still a concern for our economy.
What the Government is Saying About Inflation
Though inflation rates seem to be slowing down, the Fed continues to tell the public to expect continued inflation in the future. Eventually, they believe that inflation will lead to healthy price growth over the long haul. These high “transitory” inflation rates have been contested by the persistently high prices in the last several months. However, the Fed believes that our economy will be able to tolerate higher-than-normal inflation rates for a modest period since inflation has been previously low for the past 10 – 15 years. They believe that increasing employment is the key to getting rid of high inflation.
At the end of the day, only time will tell us how our economy and our return to normalcy will affect inflation in the future.
How Inflation Affects the Real Estate Market and Investors
So, inflation is definitely real — but how is it going to affect you as a current or upcoming real estate investor? Here are some inflation consequences when it comes to real estate investing.
Properties Will Become More Expensive
Houses, and all other properties, will increase in price when high inflation occurs in any economy. The reason for this is quite simple. As prices related to construction increase (e.g. material, planning, labor) — construction companies have no choice but to raise their own service prices. This increased price in construction is negative two-fold. Firstly, increased construction prices will directly increase the price of new properties. Secondly, a lack of new properties will indirectly drive up the prices of existing properties if demand grows.
The Cost of Borrowing Will Be Higher
As a general rule, if inflation rises in a growing economy, central and individual banks will increase interest rates to combat the rate of inflation. Without favorable loan terms, many real estate investors will be deterred from investing or expanding their investment portfolios. For potential homeowners, they may no longer be able or want to buy a home due to this extra money that was previously unaccounted for.
Rental Rates Will Skyrocket
Due to the high costs of mortgages, many potential homeowners will be swayed or forced to opt to rent rather than buy. Combined with the higher cost of general living — it is no surprise that rent demand increases so much during times of high inflation. With higher demand for rentals, landlords can drive up rental rates without much or any lash back. Depending on if you own a rental, this negative effect could very well be a positive for your real estate journey.
How Investing Offsets inflation
Luckily, there is some good news for real estate investors that currently hold properties. Inflation isn’t good for real estate per se, but at least you’ll have a hedge against rising prices. That’s thanks to the wonderful concept of appreciation. Appreciation offsets inflation and actually gives you more money in the long run. That’s because, over the last decade, the appreciation rate of U.S. real estate has been higher than inflation rates. If you currently own a rental property that is ready to house tenants, you’ll be in even better hands in this high inflation economy.
To Wrap Up
Real estate can be difficult. That’s especially true in our rapidly ever-changing economy. We’re experts that are ready to help you navigate the tough currents of inflation. Whether you’re an investor, homeowner, or potential homeowner — keep Intempus in mind! We’re a one-stop-shop real estate company that specializes in real estate asset management, acquisitions, and relationships. Click the contact page to send us a message or give us a quick ring at (408) – 748 – 7592. Don’t worry, we don’t bite!