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How will High-Inflation Affect Real Estate

What is happening right now?

Everyone is talking about it.  Inflation is speeding up as the Consumer Price Index for April 21 showed that consumer prices leap 4.2%, fastest since 2008.  Other information suggests that real inflation could be much higher.   Tyson, the nearly $30 billion food supplier, raised its prices by an average of 7.5% in the 1st Quarter of 2021.

The increase in the annual headline CPI rate was the fastest since September 2008, while the monthly gain in core inflation was the largest since 1981.

Energy prices overall jumped 25% from a year earlier, including a 49.6% increase for gasoline and 37.3% for fuel oil. That came even though most energy categories saw a decline in April.

Prices at the pump, which fell 1.4% in April, have resumed their climb in May, with the national average eclipsing $3 a gallon for the first time since November 2014, according to AAA. Further rises are likely from Friday’s cyberattack that shut down Colonial Pipeline’s main transmission line from Houston to New Jersey.

Used car and truck prices, which are seen as a key inflation indicator, surged 21%, including a 10% increase in April alone. Shelter, another key CPI component, was up 2.1% year over year and 0.4% for the month.

 

What happens to Real Estate during Inflation?

Probable positives during times of high inflation are rising prices for rental property rates. During high inflationary times, it can be difficult to get a mortgage. High-cost mortgage rates mean buyers have less purchasing power, so many continue to rent. This surge in demand results in increased rental rates, which is great for landlords.

While appreciation is a distinct and separate market analysis, in general, housing prices tend to rise in an inflationary economy. Real estate has intrinsic value; people need to have roofs over their heads regardless of the value of their currency.

Potential negatives for a real estate investor in inflationary times is the increased cost of borrowing debt. To make sure the bank doesn’t get shorted, they’ll charge higher interest rates and offer fewer loans.

Increased costs of building materials for new homes is another disadvantage. Between the high cost to borrow and the additional cost to build, new construction can be a very difficult investment during inflation.

When pockets get tight, travel usually gets cut from the budget pretty quickly. Vacation rentals, locations that are driven by tourism, or retirement communities may not fare as well as other forms of real estate investing.

What is the Fed saying?

As I mentioned above typically during high inflationary times it can be difficult to get a mortgage and the cost of getting a mortgage can be very high.

BUT that is not true right now.

Fed Chairman Jerome H. Powell has stated many times that the central bank would now tolerate a higher level of inflation than in the past, when policymakers have lifted rates preemptively to head off a potentially overheating economy marked by rising consumer prices and falling unemployment.

Right now, Federal Reserve policymakers and many economists are dismissing the current round of numbers as transitory, with the expectation that inflation settles down later this year around the 2% range targeted by the central bank.

But this is absolutely INSANE! 

The Fed even admits that they were caught off guard by the inflation number.

US Fed Vice Chairman Richard Clarida:

“We were SURPRISED by higher than expected inflation data.”

 

The markets and institutional investors are showing you that they do not believe what the Fed is saying.

These Federal Reserve officials, are supposed to be protecting the U.S. from high inflation, but they just continue to insist the increase is temporary.

Businesses can’t keep up in demand, a problem exacerbated by ongoing bottlenecks in the global trading system tied to the pandemic. Computer chips are especially in short supply and that’s held up production of new autos and other manufactured goods.

Americans are also rushing to dine out, travel or go far away for vacation, activities they shied away from during the pandemic. That’s also driving up prices at popular vacation resorts and other venues where people plan to congregate.

 

So what should you do? How do you Hedge against Inflation?

(I am NOT a financial advisor)

You should be buying Tangible Scarce Assets like REAL ESTATE.   Especially right now when the Federal Reserve is keeping interest rates down.

As we mentioned before the cost of a mortgage has not increased.   In fact, the interest rates on a mortgage are well below the inflation rate.

Othere assets that in the past have typically been a hedge against inflation:

 

Bottom Line

Get ready because inflation is coming whether or not the powers that be choose to accept it.