As 2022 kicked in full gear, the deepest fears of many market specialists seem to have come true. Inflation in the US reached an almost record-breaking rate, and we’re on the verge of another significant financial crisis.
Is real estate still solid gold?
You might wish to learn about the best investment opportunities during a recession in the course of such dark times. If you’re considering this, you will automatically get to real estate. Is it worth betting on buying or selling properties during challenging times? Anyway, how do real estate and inflation relate to one another? The answer might surprise you. So buckle your seatbelts and join us for the wild ride!
One thing we can say in advance. Suppose you consider investing in properties of a stable value. In that case, it would be best to find a real estate agent before doing something reckless. Together, we can scout for hidden gems that will stand the test of time (and inflation), along with bringing you a high return on investment.
How did we get there? Inflation in the US step-by-step
The Federal Reserve, America’s central bank, has a fair share in the present situation. During the Covid pandemic, they were forced to increase the money supply through government stimulus to counterbalance a failing economy and fend off inflation.
However, the goods on the market didn’t grow organically with the boosted money supply. Printing money in excess resulted in more cash chasing the same amount of goods and services. As a result, the (temporary) good times we lived during the initial period of the pandemic didn’t last long, and the prices rose exponentially this time.
More money, fewer goods
Another essential ingredient was keeping the federal funds’ interest rate low, which ultimately proved a grave mistake on the FED’s behalf. Consumers could obtain cheap loans at pre-2020 interest rates. In the short term, it boosted the purchasing power. However, in the long run, it almost killed the economy.
By this time, many savvy real estate investors managed to buy properties (almost) for a song and now can consider themselves extremely lucky.
Here comes the higher interest rate!
In the meantime, the Fed realized the emerging catastrophe and started to raise the interest rate to push inflation down. Banks also began the process and granted higher mortgages and loans than usual. But, it was too late. The utility, energy, and financial markets were the US economy’s most affected sectors.
Does inflation actually help real estate?
In short, inflation means higher prices and lower purchasing power. This triggers the expenses of basic building materials, such as lumber, wood, concrete, and drywall. And we haven’t mentioned shipping costs yet. Thus, the budget for new construction projects increases.
As you can tell, a whirlwind of after-effects is created, affecting rent prices as well. Home builders will also charge the home buyers more, which we call cost-push.
Housing demand and supply are in focus.
Let’s think about this idea of causality for a second! The lack of new housing inventory creates a higher demand for existing homes, a demand pull. It’s a fact that Americans move to trendy relocation destinations for various purposes constantly. The need for housing options, affordable rents, and buying properties will never cease. However, what happens if there aren’t enough houses and condos, aka the supply, is finite?
Is real estate invincible?
The price of existing homes has skyrocketed. Imagine a good wine: the older it gets, the higher its price soars. And the escalating money supply didn’t help either. Suppose your money’s worth is not the same as it used to be. In that case, property sellers can and will also ask for a higher price.
Just think about it; how could not even Covid damage the real estate market? People were kept under lockdown, and there wasn’t too much room to move. To a certain extent, Covid was similar to the financial setback we experience today. However, the real estate market has been doing fine in both cases. Moreover, the market in certain US cities boomed during the pandemic, that’s for sure.
While real estate is definitely not bulletproof, few can find its Achilles heel. Normalcy would establish a solution to lower home prices, meaning inflation goes down, interest rates are relatively high, and building materials are affordable again. New and cheap constructions can genuinely compete against older properties. However, aren’t we too far from returning to normalcy with ongoing wars and financial crises?
The current stand of the financial world
As the FED kept interest rates low or at zero, many investors and home buyers had access to “easy money.” In 2022, interest rates seem high, but they’re back to where they were at the end of 2018. As of September 2022, mortgage rates are again attainable, enabling smooth home purchases.
It’s no miracle that virtually no one can precisely predict upcoming housing market trends. It’s the speed at which new changes are implemented that perplexes investors. However, one thing is for sure:
Inflation kills bank savings.
Most Americans put their confidence in banks and savings accounts. Actually, savings are sitting ducks ready to be evaporated by inflation. Savers, be aware! Increasing prices act like a burglar going for your money kept at home under your pillow or in banks. Your cash deposited, even at an approximately one-percent interest rate, won’t be worth the same as on the day you put it in.
Alternative to rainy day funds
Instead of keeping your money locked in a bank account, we suggest looking into diversifying your investment portfolio. If you bet on several investment opportunities during inflation, you have absolute chances to make some money.
And what are these unique opportunities? Firstly, you might wish to upgrade your home with sustainable green energy sources to cut monthly expenses. Then, why don’t you investigate recession-proof company bonds, dividend-paying stock, and real estate investment trusts?
And then, you have real estate, the undisputed heavyweight champion. A second property can serve many things, such as a second income source. The recipe is straightforward: buy a property (even if it’s rundown), fix it, and rent it out. Then, you can flip it expecting a higher return.
If you think about it, the relationship between inflation and the real estate market isn’t as complex as it first appears. So does inflation aid the housing market? It’s a far stretch, but it impacts property transactions positively. Inflation boosts home prices because building material costs have also increased. Thus building new constructions won’t be as profitable.
Since we currently suffer from a shortage of cost-effective new housing, existing real estate won’t get affordable anytime soon. Moreover, you might have to dig deeper into your pockets if you wish to purchase a house. On the other hand, owners and investors can benefit from inflation by using their estates wisely.