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1. DEFINITIONS…
What is Inflation? A general increase in prices and fall in the purchasing value of money.
What is appreciation? Increase in monetary value.
Appreciation is when the ‘intrinsic value’ of something, like a house increases. This is not the same as ‘price’ or ‘cost’, we are talking about VALUE, as in, something grows more valuable.
How does something actually gain VALUE or Appreciate?
-increased demand, not enough supply
-additional value is discovered on your property; oil for example, or developed road frontage, or adding utilities where there weren’t any before.
-Amazon, Google or Tesla decides to relocate 3,000 employees to your town and there aren’t enough homes to go around. (Supply and demand).
APPRECIATION reflects a change in the actual property itself.
INFLATION can look just like appreciation, but is not ACTUALLY appreciation.
Inflation is when the actual number of dollars it takes in order to purchase your property has increased. The main difference is that inflation does not actually reflect a change in the asset itself.
Instead, inflation is a reflection of the decreasing purchasing power of the money you trade for that asset. It’s not that the asset is ‘worth’ more it’s that the money you had before doesn’t have as much purchasing power as it used to. You have to give more to get the same product. Inflation simply means that your money is worth less.
2. How does this affect our real estate market today?
From Bigger Pockets:
On April 11, Federal reserve chairman Jerome Powell appeared on 60 Minutes, and stated that “it’s highly unlikely” that the Federal Reserve will raise interest rates this year. This is music to the ears of investors of all types, as low interest rates tend to provide fuel to a growing economy.
But there are more considerations afoot—like rising inflation.
The Fed’s target interest rate, which is what Powell is referring to here, is an important indicator for mortgage prices—particularly adjustable-rate mortgages (ARMs) and HELOCs (home equity lines of credit), which are often tied to this rate.
On Tuesday, the Bureau of Labor Statistics announced that the consumer price index—a common measure of inflation—rose at its fastest rate in nine years. It’s not wild inflation, but it IS the highest rise in inflation since 2012.
Powell’s appearance on 60 Minutes will only help things. It was basically a signal to all Americans—particularly investors—that the Fed’s Cheap Money Store will be open 24/7 for the foreseeable future. This should keep interest rates on ARMs and HELOCs very low. It also allows businesses to borrow, invest, hire, and do everything that helps long-term economic growth. This translates to appreciation.
3. Real estate investors don’t mind inflation so much because the value of their property increases while their payment stays the same, and if it’s a rental property, rents go up.
Even if the Fed does end up inching the interest rate up (which they say they won’t but they will continue to get pressure to do so), supply and demand remain strong and interest rates less than 5% are still historically and outrageously LOW.
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