Many financial experts are talking about inflation these days. Why? Think about it…to inflate means to increase, to become larger. And prices for everything are increasing.
As prices inflate, the purchase power of a dollar decreases. One day an apple costs $.50. The next day, a day when the price of that same apple increases, that apple costs $.75. If you only have $.50 on the day the cost of that apple increased or inflated to $.75, you can’t get that one apple. If you have $1.00 and you had wanted to buy two apples, you now can only afford to get one apple at the newly inflated price.
Inflation most definitely impacts the real estate market…so much so that Tim and Julie Harris are beginning a series of articles and discussions about this very topic. Here is the first of several articles about the possible effects of inflation on real estate.
Inflation as a concept is fairly nebulous, fairly vague. Inflation as a reality is something else. Inflation makes complete sense when the dollars you have in your wallet or your Apple Pay or Square Cash account can no longer buy what you want to buy.
Think about what goes in to the makings of a house. Lumber, steel, concrete, glass, tile, copper, you name it. When the cost of all those materials, also called commodities, goes up, the price of that house goes up.
One day the cost of lumber is $1,000. The next day, that same lumber costs $1,500. The house still needs that lumber so that newly inflated lumber cost has to be paid for by the building contractor and/or developer. And guess what? That developer/building contractor will “pass along” that newly inflated lumber cost to the consumer, the person who buys that house. One day the price of that house was $300,000; the next day, that price of that same house was increased to $350,000.
Same goes for the price of money. Rising inflation affects interest rates. This last week we saw the Fed raise interest rates again to “quench the fires of inflation.” Makes sense in a lot of ways… unemployment rates currently stand at 3.8%, the lowest rate in 18 years, the stock market has been on a tear, companies are making money.
What’s not to like. The Fed wants to somehow ensure that employers don’t raise wages too quickly (they might do that in order to keep the workers they have or to recruit new workers they want) so the Fed is making money itself more expensive.
Interest rates, for the past 10 years or so, have been the lowest in history. On October 4, 2012, interest rates stood at 2.69%. Why? The Fed wanted to kick start the economy. It wanted people to buy things…like houses.
As of this last week, interest rates stood at 4.65%. If consumers want to buy a home, they can shop around for a better rate but better rates are dependent upon a person’s credit rating, the amount of the down payment, terms of the mortgage loan…you as real estate agents know all those variables and more but prospective home buyers may not.
What prospective homebuyers do know is that in October 2012 they could afford to pay $1,000 for a monthly mortgage loan payment for the home they wanted and that this month, they would have to pay close to $2,000 for a monthly mortgage loan payment on that very same home.
Would those same prospective homebuyers be able to afford that home at the newly inflated price or would they instead choose to rent?
Rentals, protections against inflation, foreclosures, etc.… all of real estate are effected by inflation.
We’ll get to these things and more in this ongoing series on inflation and the real estate market. Stay tuned. And, if you have any specific questions, please send them along to us.