Inflation and the Real Estate Market have an interesting relationship
There is no doubt inflation is hitting the US hard. It doesn’t matter if you are in Seattle or Miami, you’re feeling the effects of inflation. But how does inflation influence the real estate market???
Rising Interest Rates
Rising interest rates are the largest indicator of inflation. Overspending drives prices up, and this is the definition of inflation. To combat spending, the Federal Reserve increases interest rates. With higher interest rates, consumers are less inclined to borrow money, which brings down spending, which brings down prices. Interest rates are the best tool the Federal Reserve has to combat inflation.
What happens to home prices?
Normally, with higher interest rates, house prices would drop. This might not be the case in this cycle. Throughout the entire US, there have been 4 to 6 million fewer homes on the market needed to fulfill the demand. Because of higher interest rates, demand goes down, however there has been so little supply that we are not likely to see a price drop in houses. However, average home prices increase 19% since the pandemic started, and these higher interest rates will bring home appreciation down to pre pandemic rates.
How about new construction?
Inflation means the cost of goods goes up and wood, cement, paint, and glass are all more expensive. Price increases in building materials mean that renovations and new constructions are more expensive. Investors looking for a flip will be less inclined to do so, because the increased cost of renovation eats into their ROI. Home builders will be less inclined to start new projects, and this means that years down the line there will be less new homes from buyers to choose from.
What if I'm renting?
Rent is not immune to inflation and in Seattle, on average year over year, rent has increased 18%. The rest of the US is not far behind. This is another reason investors are less inclined to buy and flip, and more inclined to hold and rent. At this point in time, it’s not necessarily a good idea to buy for the short term. If you are looking to invest in real estate, now is the time to build your portfolio and take advantage of the rising rent prices.
What is next?
The US economy is on a cycle and unchecked inflation leads into a recession. Since the 1950’s every time inflation exceeded 4% and unemployment was under 5%, the US economy has gone into a recession within 2 years. Recession is a topic for another blog post. Just remember that the value of money goes down during inflation, and up during recession. Start generating passive income now, so you can be comfortable if a recession hits.
If you have any questions or are looking for someone to guide you through the process, feel free to reach out to us. We are always available!