Although rising housing expenses are expected to reduce slightly in the coming year, as long as inflation remains high, the cost of purchasing a home will continue to rise. Housing costs are expected to grow 16 percent year over year (YOY), according to The Motley Fool. That means a $400,000 house in 2021 will cost $464,000. Potential home buyers who saved $80,000 (20%) for a down payment on a $400,000 house will now need to come up with an additional $92,800 for the same home.
Higher Rates May Slow Rising Home Values
When mortgage rates rise, more homes become unaffordable. As a result, there are fewer active buyers on the market, lowering housing demand. While there is still a significant lack of properties on the market, lower demand and fewer buyers tend to lower property prices. Higher mortgage rates are likely to halt the runaway surge in home values observed during the previous years, even if they don’t push property prices down.
Is growing inflation beneficial to the real estate market?
The shelter index grew 0.4 percent month over month, while the rent and owners’ equivalent rent indexes also up 0.4 percent. Similarly, home prices in the United States are continuing to rise, up 19.8% year over year, according to recent data from the S&P CoreLogic Case-Shiller Indices.
Inflation, in a nutshell, is the progressive rise in the price of goods and services in a specific market. And when the general price level rises, each unit of currency can purchase fewer goods and services. As a result, inflation is defined as a decrease in the purchasing power of money. A common statistic of inflation is the inflation rate, which is defined as the annualized percentage change in a general price index.
Inflation wreaks havoc on the economy’s pricing structures, forcing individuals and businesses to make less-than-optimal spending, saving, and investment decisions. Furthermore, when inflation occurs, economic players frequently take steps to protect themselves from its negative consequences, diverting resources away from more productive activity.
In the end, wasteful actions can reduce earnings, stifle economic growth, and reduce living standards. Because of these wide-ranging distortions, inflation must be kept low in order to stabilize the economy and promote the productive use of resources.
Real estate has always been thought of as a great inflation hedge. According to researchers from the University of Pennsylvania’s Wharton School, the US consumer price index (CPI) reached 13.5 percent in 1979, the highest level since 1947. The average dividend income from REITs trading on the stock exchange that year was 21.2 percent, which is interesting. In addition, annualized consumer price inflation in the first eight months of 2011 was 5.1 percent. REIT returns, which averaged 8.4% annualized total returns over this time period, once again protected purchasing power.
REIT dividend growth averaged 7.71 percent per year between 1978 and 2011, while consumer price inflation was only 3.92 percent. To put things in perspective, REIT dividend income beat inflation in 306 of the 404 months. Because of these factors, REIT returns were able to keep their purchasing power throughout the era.
On private real estate, similar consequences have been observed. Private real estate total returns were robust throughout inflationary years, according to a 43-year examination of the NCREIF Property Index. The 12-month period ending in Q3 2021, for example, saw annual real GDP growth and inflation rates of 4.9 percent and 5.4 percent, respectively, but the NCREIF Property Index grew at a solid annual pace of 12.1 percent.
During periods of rising inflation, owning real estate has a lot of advantages. First and foremost, as property values stay pace with inflation, owners will experience an increase in value. Furthermore, as a result of increased labor, material, machinery, and other costs, fewer real estate development projects are undertaken, resulting in a decrease in property availability, leading to further price hikes.
Second, inflation raises all prices, including rentals. Occupancy rates often surge when home production slows and demand for existing units rises. In such circumstances, landlords boost rents, generating more cash (and increasing property value) according to CoreLogic data, nationwide rentals jumped 10.2% year over year in September 2021.
Finally, fixed-rate mortgage payments do not fluctuate over time, i.e., payments remain constant while equity growth accelerates. Inflation also lowers the value of money owed in the future.
Advisors and investors should be mindful, however, that as mortgage rates rise during inflationary periods, demand for real estate tends to fall as debt becomes more expensive. The consequent drop in demand may have a detrimental influence on asset prices.
“Despite uncertainty from the omicron variant and other hazards,” CBRE research predicted in December 2021, “a growing economy will fuel demand for space and increase real estate investment across all building types.”
Inflation in the United States reached multidecade highs in 2021, owing to strong economic growth, labor shortages, and stifled supply chains. Nonetheless, interest rates will not rise enough to hurt real estate markets, according to CBRE, with the 10-year Treasury yield expected to touch 2.3 percent by the end of 2022. (up from 1.4 percent in early December).
However, the real estate picture for next year remains optimistic. In instance, multifamily investment volume in the United States is predicted to approach $234 billion in 2022, up 10% from 2021, indicating that the market is still recovering.
To summarize, in a volatile global market, privately held, high-quality real estate with predictable income streams can be an excellent allocation option. Real estate has long been praised by advisers and investors for its capacity to weather inflationary pressures while keeping and growing value, in addition to providing relatively high yields, moderate volatility, and various portfolio diversification benefits.
This website does not provide investment, tax, or financial advice. For counsel on your individual circumstance, you should seek the opinion of a licensed professional.
Will property prices plummet due to inflation?
“When you look at the current state of the housing market, you can still observe significant discrepancies between available supply and demand. Housing prices will not fall unless demand is reduced as a result of rising interest rates.
“We’ll see a normalization of the market when supply and demand (finally) align, but I don’t expect house prices to fall – they’ll just stop growing exponentially like they have in the past year. In the short run, as buyers scramble to find a home before higher rates take effect, we may see housing prices rise.”
What happens to the home market when interest rates rise?
During inflationary periods, practically everything increases in price, including housing costs and rent, as well as mortgage interest rates. With real estate, there are three basic strategies for investors to protect themselves from inflation and rising costs.
- Take advantage of low interest rates: According to Freddie Mac, 30-year fixed rate mortgage interest rates are now averaging 3.07 percent (as of October 2021). Low interest rates allow an investor to take advantage of inexpensive money now in order to avoid paying higher rates later.
- Exporting inflation to tenants: Having a single family rental home may allow an investor to pass on rising costs to a renter in the form of increased monthly rent. Vacant-to-occupied rent growth has climbed by 12.7 percent year-over-year, according to Arbor’s most recent Single-Family Rental Investment Trends Report, compared to the current reported rate of inflation of 5.4 percent. Since May 2020, yearly rent growth for single family houses has averaged 8.1 percent, compared to a historical average of 3.3 percent. In other words, recent rent price growth has exceeded inflation by 2.7 percent to 7.3 percent.
- Benefit from rising asset values: Housing prices have a long history of rising, which is one of the reasons why investors utilize real estate as an inflation hedge. The median sales price of houses sold in the United States has climbed by 345 percent since Q3 1990, and by approximately 20% since Q3 2020, according to the Federal Reserve.
What happens if inflation continues to rise?
Inflation raises your cost of living over time. Inflation can be harmful to the economy if it is high enough. Price increases could be a sign of a fast-growing economy. Demand for products and services is fueled by people buying more than they need to avoid tomorrow’s rising prices.
Is inflation beneficial to homeowners with mortgages?
- Inflation is defined as an increase in the price of goods and services that results in a decrease in the buying power of money.
- Depending on the conditions, inflation might benefit both borrowers and lenders.
- Prices can be directly affected by the money supply; prices may rise as the money supply rises, assuming no change in economic activity.
- Borrowers gain from inflation because they may repay lenders with money that is worth less than it was when they borrowed it.
- When prices rise as a result of inflation, demand for borrowing rises, resulting in higher interest rates, which benefit lenders.
Will the housing market collapse in 2022?
While interest rates were extremely low during the COVID-19 epidemic, rising mortgage rates imply that the United States will not experience a housing meltdown or bubble in 2022.
The Case-Shiller home price index showed its greatest price decrease in history on December 30, 2008. The credit crisis, which resulted from the bursting of the housing bubble, was a contributing factor in the United States’ Great Recession.
“Easy, risky mortgages were readily available back then,” Yun said of the housing meltdown in 2008, highlighting the widespread availability of mortgages to those who didn’t qualify.
This time, he claims things are different. Mortgages are typically obtained by people who have excellent credit.
Yun claimed that builders were developing and building too many houses at the peak of the boom in 2006, resulting in an oversupply of homes on the market.
However, with record-low inventory sweeping cities in 2022, oversupply will not be an issue.
“Inventory management is a nightmare. There is simply not enough to match the extremely high demand. We’re seeing 10-20 buyers for every home, which is driving prices up on a weekly basis “Melendez continued.
It’s no different in the Detroit metropolitan area. According to Jurmo, inventories in the area is at an all-time low.
“We’ve had a shortage of inventory, which has caused sales prices to skyrocket. In some locations, prices have risen by 15 to 30 percent in the last year “He went on to say more.
Is inflation beneficial to real estate investors?
I admit that I’m old enough to recall the 1970s flares, discos, and collars.
But not just the modest 2 or 3 percent inflation of the previous year, but true double-digit inflation, the kind that saw the price of a Marathon go from 2 pence to 2 and a half pence overnight. Indeed, following the 1973 oil shock, when the price of oil quadrupled (are there any parallels here with our current economic woes?) For the rest of the decade, inflation stayed in double digits, peaking at 24 percent in 1975.
The Consumer Price Index is now rising at 3.3 percent (1.3 percent higher than the official objective of 2%), while the Retail Price Index (excluding mortgage interest payments) is rising at 4.4 percent (not far off 2 percent above its old 2.5 percent target).
However, most of us believe that these data understate the true situation. Majestic, the wine retailer, said that wine prices would have to climb by 10% to meet transportation expenses and the increasing euro, and that banana prices would rise by 8%.
The majority of this inflation comes from outside the country, in the form of increased gasoline and food prices. Twelve of the 55 countries surveyed by the Economist have double-digit inflation rates.
Inflation, according to most economists, is bad for economies. Consider what is happening in Zimbabwe, when buying a loaf of bread from the local market requires a barrow load of cash. Consumers and businesses find it difficult, if not impossible, to make economic decisions due to the lack of pricing stability.
Landlords, like all consumers, are affected by growing costs and prices. Landlords have been hit hard by enormous labor price inflation in recent years, as skill shortages have driven up the cost of hiring all trades, including plumbers, builders, and decorators.
Other expenses, such as accounting and buy-to-let insurance, are also rising.
The one big benefit of inflation for landlords is that, because many landlords use a buy-to-let mortgage to secure an investment, their loan costs are the most expensive part of their rental business. Inflation, on the other hand, is excellent news for borrowers like landlords, and here’s why.
If a landlord takes out a 100,000 interest-only buy-to-let loan over 20 years in a zero-inflation country like Japan, that buy-to-let mortgage will still be worth 100,000 after 20 years. Consider the case when inflation is running at the Bank of England’s current target rate of 2%. This means that the buy-to-let loan’s true real value will have decreased to 67,297 after 20 years.
Consider a scenario in which inflation is twice the Bank of England’s target rate, with a long-term average of 4%. In this case, the loan’s real value drops to 45,639, which is less than half of its original value.
As a result of declining property values and rising buy-to-let loan costs, being a landlord may not seem like a great place to be. Inflation, on the other hand, may be just what landlords need to reduce the real value of their buy-to-let loans. There is a silver lining to every dismal sky, as the clich goes. In this scenario, inflation may very well be the culprit!
Where should I place my money to account for inflation?
“While cash isn’t a growth asset, it will typically stay up with inflation in nominal terms if inflation is accompanied by rising short-term interest rates,” she continues.
CFP and founder of Dare to Dream Financial Planning Anna N’Jie-Konte agrees. With the epidemic demonstrating how volatile the economy can be, N’Jie-Konte advises maintaining some money in a high-yield savings account, money market account, or CD at all times.
“Having too much wealth is an underappreciated risk to one’s financial well-being,” she adds. N’Jie-Konte advises single-income households to lay up six to nine months of cash, and two-income households to set aside six months of cash.
Lassus recommends that you keep your short-term CDs until we have a better idea of what longer-term inflation might look like.
Before inflation, what should I buy?
At the very least, you should have a month’s worth of food on hand. Depending on your budget, it could be more or less. (I cannot emphasize enough that it must be food that your family will consume.)
If you need some help getting started, this article will show you how to stock up on three months’ worth of food in a hurry.
Having said that, there are some items that everyone will want to keep on hand in the event of a shortage. Things like:
- During the early days of the Covid-19 epidemic, there were shortages of dry commodities such as pasta, grains, beans, and spices. We’re starting to experience some shortages again as a result of supply concerns and sustained high demand. Now is the time to stock your cupboard with basic necessities. Here are some unique ways to use pasta and rice in your dinners. When you see something you like, buy it.
- Canned goods, such as vegetables, fruits, and meats, are convenient to keep and can be prepared in a variety of ways. Individual components take more effort to prepare, but also extend meal alternatives, which is why knowing how to cook from scratch is so important. Processed foods are more expensive and have fewer options. However, if that’s all your family eats, go ahead and stock up! Be aware that processed foods are in low supply at the moment, so basic components may be cheaper and easier to come by.
- Seeds
- Growing your own food is a great way to guarantee you have enough to eat. Gardening takes planning, effort, and hard work, but there’s nothing more delicious or rewarding than eating something you’ve grown yourself. If you’re thinking of starting a garden this year, get your seeds now to avoid the spring rush. To get started, look for videos, books, or local classes to assist you learn about gardening. These suggestions from an expert gardener will also be beneficial.
Buy Extra of the Items You Use Everyday
You may also want to stock up on over-the-counter medicines, vitamin supplements, and immune boosters in case another Covid outbreak occurs. Shortages of pain relievers and flu drugs continue to occur at the onset of each covid wave, which is both predictable and inconvenient.