If you've followed the news lately, you've probably seen quite a bit about inflation. The consumer price index jumped 0.8% in February, bringing the total increase over the last 12 months to 7.9% – this is the largest annual jump in the last 40 years.
So, how does all of this affect the real estate market?
The Inventory Issue
Interest rates have been kept low for so long it's created a bubble for everything and not just the housing market. There's also inflationary pressure on the housing market because of limited inventory. Limited inventory stems from a myriad of problems in the industry.
First, many homeowners aren't putting their houses on the market. This is due to factors like lockdowns, but also the fear they won't be able to find a new home to buy.
There are construction delays due to supply chain bottlenecks as well.
Low inventory means buyers are often having to put in bids well above asking to get properties, creating a frustrating situation, to say the least.
Other Inflationary Effects On Real Estate
There are a few other ways inflation can influence how much you pay for a home.
First, inflation is a reference to a rise in the price of everyday goods. Those everyday goods are used to build homes. If the price of things like lumber and appliances go up, then the builder will pass those additional costs onto the buyer in the form of higher prices.
In some cases, however, inflation can have oppositional effects on real estate. If inflation rises, then theoretically, money should become more expensive to borrow. People borrow less of it, so there are fewer home purchases and that can lead to lower prices.
Real Estate Can Protect You Against Inflation
While real estate can be negatively affected by inflation in the form of higher prices, it can also protect you from its effects.
As home prices go up over time, you're lowering the loan-to-value of your debt. You're simultaneously increasing your equity, but your fixed-rate mortgage payments will stay the same.
If you’re a real estate investor earning income from rental properties, then you're likely going to be able to charge higher rent when inflation is up. You can adjust the rent while the mortgage stays the same.
The relationship between housing and inflation can go in both directions. If you're a buyer right now, inflation isn't good news, but if you own a home, it can be one of the best ways to protect yourself against rising prices.