What is next for real estate market amidst rising inflation?
Inflation is defined as a loss of money’s purchasing power, which is often represented in an increase in the cost of goods and services in the economy. As a result, as inflation rises, every dollar you make loses value, affecting your ability to spend.
Inflation for economic stimulus
On December 10, 2021, the Bureau of Labor Statistics stated that the U.S inflation rate increased by 6.8%. The largest percentage rise year-on-year since 1982. As inflation increases, so do interest rates. Banks increase interest rates to actually discourage borrowing and slow down consumer demand. In Real Estate, this is a way to control the rise of housing prices as demand keeps on rising and evident shortage of home inventory is observed. This is to protect the industry from entering into a phase of real estate bubble as what happened in 2008 where the largest price drop in history is observed and is one important cause of the great recession in the U.S.
Rising interest and mortgage rates
Meanwhile, mortgage rates are expected to rise with rising interest rates. This is where the housing market is expected to slowly cool down as buyer’s purchasing power is affected. As of March 31, the average 30-year fixed mortgage rate stood at 4.67%—up from 3.11% at the end of December.
However, expecting the slow cool down of the housing market with rising interest rates and mortgage rates, the housing prices are still projected to increase by 17.8% this year 2022 as forecasted by Zillow Forecasts. The demand is aligned with the report from Fortune stating that we’re still amid the five-year window (between 2019 and 2023) when every millennial born in the generation’s five largest birth years (between 1989 and 1993) will hit the all-important first-time home buying age of 30.
Real Estate as an investment
On the other note, when there is inflation, it is imperative for investors to shield themselves from market uncertainties, it’s a matter of finding productive assets to invest in the longer term to hedge against these rising rates. In contrast to that, in an article published by Forbes.
“…real estate investments have the characteristic of performing well in a rising rate environment. In particular, income-generating real property and multifamily have historically — and as I’ve witnessed from experience as an investor and developer — shown a greater ability to grow net income during expansionary periods than securities and other assets.” – Aris Teagar, CEO of Rastegar Property Company
To put that into perspective, the U.S Inflation may have hit record highs in 2021, but it is expected that interest rates and mortgage rates as an imminent result of inflation will not rise sufficiently to harm the real estate markets, according to CBRE.
Moreover, in a study from Stanford University entitled “Inflation and the price of Real Estates”, they found that the inflation in 1970, has resulted in a massive shift of investment portfolio into real estate as becoming a more attractive choice to fare against inflation.
As it is customary for some to have uncertainties as rising rates appear on the horizon. The real estate market has proven itself to fare stronger than other assets in the midst of a crisis. The U.S housing market is forecasted to remain resilient and that housing prices are still projected to increase this year even after explosive increase of mortgage rates is observed over the past weeks. Moreover, the real estate industry in the year 2022 is foreseen to continue its historic run. In particular, U.S. multifamily investment volume is expected to exceed $234 billion in 2022, or a 10% increase over 2021, continuing its strong run.
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