The Impact Of Inflation On Real Estate Market In The United States
There have been a lot of discussions recently about the present level of inflation. Real estate has long been advised as a way to protect against inflation. If you’ve recently made a real estate investment, you’ve undoubtedly already felt the effects of inflation.
Because no one can predict the future, it’s critical that you understand inflation, how it works, how it affects your real estate assets, and how to best protect yourself.
What Is Inflation and How Does It Affect You?
Inflation is defined as a rise in the price of goods and services in a certain economy over a specific time period, usually a year. For example, the average yearly rate of inflation is 1.8 percent. If you bought an electric stove for $400 last year, you’d have to spend an extra $7.20 today for the same device.
It may not appear to be a significant sum of money to be concerned about. When you tally up all of your costs, such as internet, petrol, groceries, phone bills, and other expenses, you’ll find that you’re spending a lot more money each year.
When a country experiences above-average inflation, the impact is magnified. In Greece, for example, inflation has nearly reached 5% in the last decade. It means that the $400 cooker mentioned above would cost $20 more today.
Inflation can also be defined as a loss in the currency’s purchasing power over time. The purchasing power of the US dollar, for example, has fallen by 96.5 percent since 1913. A dollar would be worth roughly 3.50 cents now if you had it a century ago.
What Effect Does Inflation Have on Real Estate Investing?
While inflation may appear to be a bad thing, it isn’t totally true. There are a few things to be thankful for. Let’s break down what inflation implies for homeowners, investors, and potential investors in this section. We’ll look at both the advantages and disadvantages.
Homeowners’ Inflation
The benefits of inflation are mostly felt by homeowners. The most obvious benefit is that the value of their properties increases in lockstep with inflation. Obtaining a mortgage during an inflationary period can be tough. Many people continue to rent because of high mortgage prices, pushing up housing demand.
Homeowners might expect higher prices when there is a high demand for houses but a limited supply. It’s not uncommon for homeowners to receive bids that are more than their asking prices. As you can see, inflationary periods are a great time to sell but a difficult time to buy.
For Investors, Inflation
Another group that benefits from an inflationary market is investors. Assume you’re looking for finance to invest in real estate as a leveraged asset at today’s low rates. You’ll end up paying the same interest rate as your property appreciates in value.
Financing rates are not rising at the same rate as inflation in the current environment. It implies your return on investment might skyrocket.
What Effect Does Inflation Have on Real Estate Prices?
The average price of a single-family home in the United States has increased by more than 90% in the last decade. Home prices are expected to rise by 13.6 percent in the coming year, according to real estate specialists.
What causes housing prices to rise during inflationary periods?
Assets that generate income are in high demand.
Real estate investors look for properties that can yield rental income above the current inflation rate, which is one of the main reasons why property prices rise during inflationary periods.
Rental income is the money received from tenants and used to pay for things like property taxes and mortgages. The return on investment is the money left over after all expenses have been paid. The capitalization rate is how we express the rate of return (cap rate).
Investors will seek properties with a higher cap rate than other investment options, such as Treasury bonds or high-yield savings accounts, during inflationary situations.
Real Estate Inventory Is Limited
Because there is a finite supply of real estate relative to fiat cash, real estate values rise during inflationary periods. During such times, governments will print additional money in order to enhance the money supply. It raises the value of real estate.
When What Should Real Estate Investors Do?
With all of these considerations in mind, the most critical consideration for prospective investors during inflationary periods is timing. One item to consider is how long you plan to keep the potential investment property.
If you plan to maintain it in the long run, you can expect to reap the same benefits as current owners, such as increased property value. If you’re intending to invest for a shorter length of time, such as through a fix-and-flip method, continue with caution.
One of the biggest risks of short-term investing during inflation is getting caught in a real estate bubble. Closing expenses might increase by up to 6% of the home’s selling price during certain times. If you’re a novice investor and don’t have enough equity to cover these charges, you could lose a lot of money if the bubble bursts.
Property values have recently surged to historic highs. While the trend isn’t alarming, it does highlight the significance of knowing your investment time horizon and making plans accordingly.
What Does the Future Hold for Real Estate Investors?
For starters, modern market inflation differs significantly from that which existed prior to the Global Financial Crisis. Even though there is a labor shortage, the economy is growing at a steady pace, and unemployment is decreasing. We are hopeful that the post-pandemic economy will completely reopen and expand to create additional opportunities.
Keep your guard up and perform your due diligence before making any large financial decisions. Planning ahead and managing your time will help you control your financial risk.
Due to the surplus money in circulation in the economy, real estate values tend to rise during periods of inflation. Many investors have utilized real estate as a means of protecting themselves from inflationary periods. You may use real estate to create income above the rate of inflation while simultaneously profiting from long-term property value appreciation.
