Inflation is a price rise over time, such as rising housing or rent prices. Investors may hear a buzzing horn. But it has numerous consequences, including rising mortgage rates, property prices, long-term loans devalued, construction material prices, etc.
To address this topic, we'll examine how inflation rates affect the housing market, the most typical drivers of inflation, and other crucial matters.
The Effects of Inflation on the Housing Market
The yearly inflation rate in the U.S. for the year ending in September 2022 was 8.2%, compared to the global average of 3.27%. This year's high inflation rate has increased consumer prices, property prices, and other costs, negatively impacting the economy's long-term health.
So, what effect does inflation have on the property market? The following are the positive and the negative consequences of inflation on the housing market:
Increased Home Prices
Since all consumer prices, including those for construction supplies, are affected by inflation, homebuilders are put under more financial strain. They raise the listing prices of newly constructed homes to gain revenue.
Building Construction Materials Rise
Remember that inflation refers to an increase in the price of necessities. Consider all the construction materials needed to build a new home, from cement and bricks to drywall and gypsum. These critical goods are now more expensive for home builders due to inflation.
Higher Mortgage Rate
Interest rates rise in response to rising inflation, causing people to borrow less or not at all. State banks typically raise short-term interest rates to relieve inflationary pressures.
Also, banks may impose higher mortgage rates to increase their profit by offering mortgages to spend on more expensive real estate.
Mortgage interest rates climbed in March 2022, following the Federal Reserve's first rate increase since 2018 to battle inflation. The interest rate on a 30-year mortgage surpassed 5% in April this year, up from less than 3% the previous year.
Residential Performs Better When there is Inflation.
According to economists quoted in the WSJ article, owners of businesses and homes manage better than investors in stocks or bonds during periods of rapid inflation. Office, retail, and housing rents are frequently correlated with consumer prices and increase in line with inflation, increasing property income.
Experts say that if inflation rises by 3% per year and rents are not raised, rental owners will suffer a loss that will compound over time.
Typical Causes of Inflation
There is no denying that almost everything is becoming increasingly expensive, but what drives inflation? The following are some of the causes:
● Product supply decreases due to higher production costs, while product demand remains constant. As a result of the increased production costs, consumers must pay more for finished goods.
● When demand for various goods surges across the economy, prices of those goods typically rise.
● Increased wages would result in higher business expenses, which could then be passed on to customers.
● If the economy expands and there is a demand for housing, home prices will rise.
● The expansive fiscal policies of governments can increase the amount of disposable income available to both businesses and customers.
● As the supply increases, the value decreases. When the value of money falls, it loses some of its purchasing power, raising the relative prices of products.
Does Investing in Real Estate Make Sense When Prices Are Rising?
Real estate is the best and most stable asset during an inflationary period. Given the stock market's uncertain outlook, many investors are looking to the asset class for its consistency and tax benefits.
According to the CEO of DMG Investments, people rent rather than buy during an inflationary period. It ensures that multifamily residential investors have a regular flow of renters.
A steady need for housing and real estate always exists even when prices rise. Of course, any investment involves some level of risk. However, making a wise choice when investing in rental real estate during inflationary times can pay off. As a result, investing in multifamily real estate makes sense during an inflation period.
Here are the reasons why investing in multifamily real estate, such as home rentals, is beneficial during inflation:
There will always be a need for housing. Many people cannot afford to buy homes at higher prices, regardless of whether the interest rate on a fixed-rate mortgage remains low. During inflation, property prices increase, which results in people not buying houses. Since people need shelter, meaning there's a great demand for rental properties, regardless of economic conditions. Choosing markets with high demand for rentals can help ensure a successful investment.
You have control over your asset. When investing in multifamily real estate allows you complete flexibility. You can decide who can lease your property and adjust the rental rates in response to inflation. Furthermore, there are no restrictions on when you can sell your asset.
You can increase the worth of your investment. Adding improvements to a property, such as construction renovations or landscaping, can increase its value. Y our income could go up as a result. The stock exchange or other assets do not offer the same advantages as real estate owners.
Tax breaks are available for multifamily real estate. Since property taxes can be adjusted, landlords can reduce their tax obligation on a portion of their rental income. Other tax-saving options when selling a property, such as Section 1031 of the United States Internal Revenue Code, allows you to reinvest the proceeds in a property of a similar type without paying capital gains taxes.
Inflation affects the housing market for various reasons, including rising mortgage rates, skyrocketing home prices, and increased labor and building supply costs.
Since real estate is typically less volatile than the stock market, investing in real estate can help protect you if you are concerned about high inflation. Some investors use real estate to hedge against inflation by investing in multifamily real estate and profiting from long-term price increases.
Before driving investment to achieve the goal of benefiting from real estate during inflationary increases, it is critical that you first understand your objectives and risk openness.
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