Homeowners Don’t Have To Fear Inflation
The world came to a standstill as the coronavirus spread around the world and became a full fledged pandemic. Shockwaves were sent throughout the global economy as nations underwent varying degrees of lockdowns to control its spread. In the United States, our governments took swift measures to control the spread of the virus and minimize the economic fallout. The Federal Reserve slashed interest rates to zero and the government initiated quantitative easing to prop up the mortgage industry and the stock market. This is on top of direct stimulus to Americans and small businesses. Although the economic pain was real, it could have been worse. In fact, now that the pandemic is receding our economy is growing at a rate that has not been seen since 1984. Unfortunately, another economic indicator is blinking red. Inflation fears are rising. The good news is that real estate might be immune.
Rising Fears of Inflation
What is Inflation?
The biggest economic worry on the horizon is that there is rising inflationary pressure. Inflation occurs when the supply of money in the market increases dramatically, which impacts the value of currency. Essentially, this just means that the dollar buys less than it used to because the cost of goods and services have increased. As the cost of goods and services increase it becomes harder and harder for many to make ends meet. This is a genuine fear for people. In fact, 83% of Americnas are taking steps to increase savings and decrease costs over inflation fears.
What Does the Data Say about Inflation?
There is a vigorous debate going on between economists and financial experts as to whether inflation is genuinely increasing and if it is a real problem. The data does indicate that inflation is on the rise. The Index used by the Labor Department indicates that inflation rose by 4.2% in April. That is the largest increase in inflation since 2008. Again, whether these trends continue and how bad they will be is up for debate.
Why is Inflation Rising?
The theory as to why inflation is on the rise has much to do with the pandemic. First, the cost of goods and services is rising because of shocks to the supply system. Some consumer goods are more difficult to produce and distribute because of the pandemic, which increases their price. Second, the very policies that the government used to stave off the economic harms of the pandemic increase inflationary pressure. The federal government has engaged in a lot of deficit spending to provide loans to small businesses and stimulus checks to families. Moves by the Federal Reserve to slash interest rates did their intended job of increasing lending. However, the increased lending puts a lot of money into the economy. Simply put, the fear that the cure is worse than the illness. The cure to economic failure results in inflation, which is worse for the economy.
What Does Inflation Mean for Homeowners and Home Buyers?
The real estate market is tied to nearly every other part of the economy. So, it should be no wonder that inflation would impact the real estate market. One of the biggest concerns for home buyers when it comes to inflation is how the government responds to inflation. If inflation were to spiral, it could have devastating consequences for the economy. As such, the government will take swift measures to try and tamp it down.
One tool that is available to try and control inflation is raising interest rates. The Federal Reserve is quick to increase interest rates when it thinks that inflation is possible. In turn, this will cause mortgage rates to rise. Once interest rates were dropped to zero, mortgage rates dropped to historic lows and have hovered there ever since. Higher mortgage rates are bad news for home buyers because it will mean higher monthly payments and paying much more over the life of the home loan.
Homeowners fare much better in a world of spiraling inflation than home buyers. Even moreso, homeowners are in a much better place to deal with inflation than renters. Historically, real estate has been an excellent hedge against inflation. As inflation rises, the costs of goods and services increase. Fortunately, this means that the cost of real estate increases along with it. We have written extensively about how being a homeowner is a great way to build wealth. As prices increase because of inflation, the wealth you have in your home rises right along with it.
Homeowners are not the only people who benefit from real estate as a hedge against inflation. Real estate investors also benefit. Owning multiple homes and using them as rental properties is a way of earning inflation adjusted income. As prices rise, so do rents. Those who own the rental properties benefit from the increasing costs of rent. Renters on the other hand, are the ones who take a huge hit. Renters face inflationary pressure from all sides. Consumer goods and services become more expensive along with housing expenses. Owning a home is a better financial choice than renting in normal environments. In inflationary environments, it is much more beneficial.
Final Thoughts
The data clearly indicates that inflation is on the rise. However, it is unclear as to whether or not this is a blip on the radar or part of a larger trend. We have no clue what the future holds, so it will be important to keep an eye on the data as we continue through 2021. Inflation can have a dramatic impact on the cost of living for households, which can impact the quality of life.
If inflation is a worry for you, then hedging against it with real estate might be something to consider. If you are renting, then buying a home now while interest rates are low is a way to lock up your housing expenses and prevent them from increasing. For existing homeowners, buying another home to use as a rental property might be a way to lock in income that will increase along with inflation. Either way, if buying a home makes sense for you, contact us! The team at Peoples Choice Mortgage is here to walk you through all of your options for financing your new home purchase. We offer a complimentary mortgage qualifier that will let you know where you stand when it comes to buying a home. Don’t let inflation catch you by surprise. Knowledge is power and you can use it to protect your wealth.
