What you need to know about inflation and the real estate market
The headlines right now are all about inflation. The latest inflation measures show the biggest yearly consumer price index jump in 30 years, and the largest component of that increase was the cost of rent. Rents are up over 10% from a year ago, so if you signed a lease today, you’d likely be paying substantially more than you would have one year ago. Are we just recovering from reduced rent prices during the pandemic? Is this a momentary problem exacerbated by a shortage of building supplies and labor? Not according to Mark Zandi, chief economist at Moody’s Analytics, who says, “Rent growth is gonna remain strong.”
Being locked down for a year and a half has found many Americans on the sofa shopping for various goods and services, leading to surging demand, and clogged pores. As we all know, when demand outstrips supply, prices go up (inflation). When more people needed more space for things like home offices, more buyers were chasing the same low number of available homes, creating competition and a big spike in home prices. Some of that urgency seems to have subsided, but overall, these dynamics have not really changed. We still have a massive supply/demand imbalance, as additional housing units are not being created at nearly the rate necessary to accommodate our population, and the very large Millennial Generation is reaching its prime household and family creation years.
Real estate has long been considered a hedge against inflation. If you were to borrow money using a fixed-rate loan at today’s low rates, your payment would remain the same for the life of the loan, unlike rental rates, or other rising costs. Meanwhile, the value of your property would likely increase faster, so your property would be worth more, and your equity position would grow faster relative to your outstanding loan.
If you bought a rental property, the rent you collect would go up over time, while your mortgage costs remain the same, increasing your profits.
Purchasing real estate can serve as a hedge against inflation, and as a way to control the rising costs of housing.