Inflation has gotten out of control over the past two years, reaching an increase of over 9% in June 2022. This means that the average good or service costs 9% more this summer than it did last year.
And this kind of inflation can be devastating, particularly when incomes aren’t keeping pace with quickly rising expenses.
But, if you own real estate, you have a bit of protection against high inflation. In this article, we’re going to explain why real estate is the perfect investment during periods of inflation.
What Happens to Real Estate During Inflation?
Inflation generally has a direct relationship with real estate. This means that the value of real estate usually rises when inflation rises. And this provides three benefits to property owners.
Property Values Increase. As the cost of goods and services increases, so does the value of real estate. In June of 2022, for example, the median sales price in Oakland was up 10.2% from the previous year.
Rental Rates Increase. Similarly, rents generally rise with inflation. Sticking with the Oakland market, one-bedrooms are up 10% year-over-year.
Your Mortgage Debt is Devalued. By definition, inflation means that $1 is worth less today than it was a year ago; that dollar won’t go as far today as it would have last year. And it’s the same for your debt! The amount of mortgage debt you owe is worth less now than it was last year, even if you ignore all the payments made over the past year to pay down the debt.
So, Is Inflation a Good Thing for Homeowners?
Manageable inflation of 1-3% is a good thing because it means the economy is growing at a sustainable pace. While real estate acts as a hedge against inflation for property owners, it’s still better for everyone if we keep inflation rates reasonable.
What About Deflation?
We’re starting to see inflation come down. This is mostly thanks to an intervention by the Federal Reserve. The Fed raised interest rates, which made it more expensive to borrow money, which put a damper on buyer demand. This means that real estate values might lose a bit of the impressive gains made over the last two years.
And that’s okay! Real estate is generally a long-term investment, and values will always come back up. Even if you see negative inflation, also called deflation, real estate is still considered a safe investment because of its inherent scarcity.
Take the Great Recession of 2007 as an example. The purchase price for the median American home in the first quarter of 2007 was just over $250,000. Then the economy (and the housing market) collapsed, bringing the median value down to $208,000 by 2008, and leaving millions of American homeowners owing more on their mortgage than their house was worth. This was a worst-case scenario. And yet, the median today is over $440,000. It took over five years for the market to fully recover from this catastrophe. But real estate values came back. And then they surged higher!
Should You Buy Real Estate While Inflation is High?
The biggest beneficiaries of real estate inflation are the owners who bought before the inflation began. But don’t let that stop you from creating your own real estate inflation hedge for the next inflation cycle!
While it is possible that home prices will dip temporarily as we close out 2022 and enter 2023, it’s also incredibly likely that interest rates will continue to rise. And this could make your monthly mortgage payment higher, even if your purchase price is lower.
If you’re on the fence about buying, contact Sequoia Real Estate to go over financial projections with an experienced real estate expert. We can give you an idea of how much your mortgage payments would be under today’s market conditions and how much they could be as interest rates rise.
There’s no cost or obligation for this friendly consultation. We just want to make sure you have the information you need to make a solid decision when it comes to buying real estate. Contact us today!