Inflation is here and probably will be staying with us much longer than we expect or want. The excessive printing of money from 2020-2022 was greater than all the money printed in the past 200-plus years.
The unrestrained availability of money in the market with the historically low-interest rates combined with over the top demand created a buying frenzy that diminished housing inventory as well as the limited availability of consumer goods and services. According to https://whitehouse.gov the Case-Shiller U.S. National Home Price Index has risen 18.6% over the past 12 months for the largest increase since the inception of the index.
Rental prices have now also increased wildly up 10.1% higher in 2021 than 2020, rising five times faster than in 2020, according to Realtor.com’s monthly Rental Report.
By the end of 2021 national rents were up double digits for the previous six months. The national median rent for a one-bedroom at that time was $1,651, up 19.3% over the previous year. Rents are the highest in New York City. However, rent increases have slowed and so far in 2022 are up 7.2% compared to 14.8% at the same time last year, according to apartmentlist.com. Year-over-year rent increases have slowed to 10% compared to the high of 18% at the beginning of 2022.
The only solution in the past was to raise interest rates as all the Fed chairs over the past 42 years have done. But timing is the key and the truth is no one, not even Fed Chair Jerome Powell, have been able to accomplish this feat. So far the old solution has not been as successful so far and in the short and near term or longer, we will have greater economic pain.
Moreover, President Biden’s student loan plan forgives $10,000 of student debt from loans that had been fully dispersed by June 30, 2022 if your income is less than $125,000 and less than $250,000 for couples filing a joint federal tax return. This may be a slight benefit for those in debt, but this unfortunately will also continue to add to our inflation problems.
More importantly, the forgiveness program will continue to add to our future inflation, as many now have and will continue borrowing, making an assumption that in the future a portion will also be forgiven, which is not necessarily the case according to the current rules but never say never.
Inflation was increasing in 2021 to 4.7% but by December 2021 had risen to 7% and has continued to increase through August 2022. Knowing this information, I have stated in a previous column that I believed increased rates should have been implemented early in 2021, but for whatever reason, Jerome Powell waited until March 2022.
He didn’t want to shut the economy down, but kicking the can down the road only put off the inevitable that we are currently experiencing.
He allowed a multitude of new homeowners and move-up buyers to purchase at the lowest rates in history, which you would surmise would be a benefit to the economy, but at the expense of increasing inflation. With all that cheap money, stocks really became inflated, but many are now down by 20-50% and real estate is softening. Real estate has decelerated and moderated and is taking longer for offers and sales to occur.
According to many sources, there supposedly will be another three-quarter point increase this month, so that will most likely further cool off the local and national real estate market.
Demand will decrease and slow further, but the cost of housing will continue to increase at a more moderate rate, due to still very low inventory, until it becomes more normalized in five to six months. This will then favor neither seller nor purchaser. However, prices will eventually soften further in 2023 and potentially become more of a buyer’s market.
Rental properties and real estate have generally always been an excellent hedge against inflation as a hard asset. Also, well-run profitable businesses in energy and food staples are other entities in strong positions to weather the storm and become more valuable.
As long as tenants pay their rent and the landlord’s expenses of ownership, then those values will increase as the cost of replacement escalates with inflation. However, one must be smart and prudent especially if you are a new investor when purchasing properties for cash flow or fixing and flipping.
One needs to crunch the numbers, watching interest rates and the price you pay, to make sure there is an adequate ROI and cushion to earn sufficient income.
We are in a housing recession with respect to slowing sales and construction, as fewer permits are being applied for, according to Lawrence Yun, chief economist for the National Association of Realtors. Although rent increases have slowed, affordability becomes a serious question, and residing where you are for now might be your best solution while waiting and hoping rates will decrease while also saving more for a down payment.
We all see our world in such tremendous turmoil financially and politically.
The big question is will history continue to repeat itself as real estate and certain hard assets have always been an excellent hedge and safer haven for wealth creation due to inflation?
Or will our shaky house of cards continue to erode as our debts continue to mount and territorial conflicts aren’t resolved with no end in sight? Will our fiat currency become even more diluted and morph into something more hybrid? Will real estate lose its value? Or maybe, somehow and someway we’ll come out of this economic and tumultuous and turbulent situation stronger and smarter? Readers, what are your thoughts?
Philip A. Raices is the owner/Broker of Turn Key Real Estate at 3 Grace Ave Suite 180 in Great Neck. He has 40+ years of experience in the Real Estate industry and has earned designations as a Graduate of the Realtor Institute (G.R.I.) and also as a Certified International Property Specialist (C.I.P.S) and Green Energy. For a “FREE” 15-minute consultation, value analysis of your home, or to answer any of your questions or concerns he can be reached by cell: (516) 647-4289 or by email: [email protected]
