The news came in this week that US consumer prices jumped in June the most they have in 13 years! When oil and gas prices are excluded (core inflation) prices are rising at the largest rate in 30 years! The concerns about inflation are beginning to be real as goods and services are increasingly expensive.
For real estate investors, is inflation a bad thing?
It depends on your perspective.
If you use lots of debt in your acquisitions then inflation is going to result in higher interest rates. When those rates will increase is anybodys guess. We found it interesting to learn that the Fed (the people who will ultimately decide inflation needs to cool off by taking actions to increase interest rates) has set a target of 2% annual inflation. For most of the last decade inflation was below that target. It is now above that target quite a bit at 5.4%. This is why some people are betting that the Fed will take action in 2022 to increase rates. When that occurs it means investing costs will also increase if debt is involved.
Real Estate Prices
With higher rates real estate prices traditionally decrease. Why? Because a certain portion of the market is no longer pursuing purchases. There are a number of reasons this occurs for investors. For owner-occupants it usually involves affordability. With the current low rates home purchasers can afford more home than ever before...if they can find one.
We know the supply and demand equation is out of kilter currently. We know inventory is low based on demographics. One additional piece of data that is starting to become known is that Millennials and Baby Boomers are increasingly looking at renting as a viable housing option. Millennials are renting more due to their disdain for the obligations of home ownership and Baby Boomers in order to downsize and take advantage of top dollar for the family homestead. So rental demand is increasing and higher rates may continue that trend.
Costs of Labor and Materials
Finally, if the public's expectations of inflation are that it is increasing, they may create a self-fulfilling prophesy. Wage increases to satisfy workers mean businesses must charge more which contributes to more inflation. Anybody who is hiring employees know that this expectation is occurring currently. So, expect costs of maintenance and rehabilitation to also increase.
We believe the negative factors such as increasing costs of materials, labor and interest, will be positively offset by an increase in housing inventory and a reduction in housing acquistion costs. Check back in a year and lets see if this is correct.