I have some good news and some bad news for you. There are a lot of talks about a recession. US inflation is on the news, it’s everywhere! And I think inflation is being driven by strong demand. A few articles say that the supply chain disruptions and the skyrocketing energy costs are keys to this as well.
What impact will these events have on the real estate market? Let's go over some of these articles, and I hope you can utilize this information to help you make a decision and learn more.
NPR released an article about the growing fears of a coming recession.
They say that employers bidding up wages to attract much-need workers is pushing the inflation up further than the Fed’s target.
The Fed is trying to keep inflation at 2%. Now, when it starts to go significantly higher, they start worrying about the possibility of a recession.
“For much of the past year, the Fed thought inflation was primarily the result of supply chain [disruptions] snarls that would work themselves out once the pandemic eased,” according to NPR.
And that is true! I mean, at least for our generation, we’ve never really been through a pandemic. So, it makes sense that we didn’t know how to respond.
“Instead, price hikes have accelerated. Consumer prices in March were up 8.5% from a year ago, according to data out on Tuesday – the sharpest increase since December 1981,” NPR says.
The WSJ supports this statement, highlighting that it is “a new four-decade high of 8.5% in March from the same month a year ago, driven by skyrocketing energy and food costs, supply constraints, and strong consumer demand.”
If you want to read the data mentioned, have fun. I personally didn’t read the whole thing. But the reason why they are worried is that 8.5% is a significant increase from the Fed’s targeted 2%. Plus the relief efforts for the supply chain are taking longer than they expected, and Russia’s invasion of Ukraine has added to that disruption. And, what’s most affected are exports of food and energy, which are both necessities.
It doesn’t help that the news is trying to freak us out, saying “Hey! Something bad is going to happen.” I’m trying to bring the facts the media presents to you, so we can see what is happening, and maybe draw our own conclusions based on facts, about how it will affect the real estate market.
However, it is worth noting that there is strong consumer demand, especially in real estate. I mean, have you seen the current real estate market?
We hear these words get thrown about a lot, but what do they mean?
Inflation is the rate of rising prices of goods and services. When there is inflation, the prices of necessities are higher, and can negatively impact the economy and society.
Today, the price increase is extremely visible, particularly in food and gas prices. Of all, if prices rise, we can't afford to buy things, especially for those who are already struggling to make ends meet.
A prolonged inflation can lead to a recession, which is a period of declining economic performance across an entire economy that lasts for several months, according to Investopedia.
The reason the people are talking about a recession and inflation is that as soon as they raise rates, it slows down the economy.
Now, inflation also affects interest rates. When inflation is up, interest rates will increase. This is because “interest rates are the primary tool used by the Federal Reserve, the US central bank, to manage inflation,” according to Investopedia.
When these big companies are trying to borrow money, it costs more for them. It just means that when we’re trying to borrow money, they put that cost down to us.
And now people are saying “Well, how is that gonna affect real estate? Is it gonna slow it down? Because it inevitably affects our interest rates to purchase homes as buyers.”
According to statistics, owning homes can act as a hedge against inflation. Over the years, except for two decades (the 80s and early 00s), the appreciation of homes was dramatically higher than where inflation was.
So, if you’re thinking “Hey, should I buy real estate? Where should I put my money right now so as not to get hit by inflation?” Yep. Real estate is the answer.
If you look at the average home price forecasts for 2022 by CoreLogic, HPES, Fannie May, MBA, Freddie Mac, NAR, and Zelman, it is at 6.7%. That is how much they predict your home’s value will appreciate this year 2022.
The statistics on single-family housing units completed and the new and active listings show not enough homes are being listed.
If you’re listening to the market right now, and you are in the middle of the real estate market, you’ll understand that the demand for real estate is so much higher. Even if the interest rates continue to go up a little more. Because there aren’t enough homes. Because they are being bought out by hedge funds and people who just want to move. The second-home market is still alive. But, the fact is the real estate market is still moving fast. There are still multiple offers.
And even if it slows down a little bit, that just means the buyers who want to buy houses but can’t find ones because they keep getting outbid, can finally end up buying homes. If the hedge funds step back, those who really want to buy homes finally can.
The real estate market is not going anywhere. Even if the inflation is going up, and maybe a recession is coming, investing in real estate can help you “keep your shirt on.” You can even buy another shirt, maybe some pants and a belt.
