Inflation may help home buyers in the long run. Here is why. Currently home buyers can borrow right now at less than the cost of inflation.
Typically, the Fed wishes to raise interest rates higher than the cost of inflation to help lower inflation. Right now, a borrower can get a 30-year loan in the low 5% range. Inflation has been raging at over 9%. That’s almost a 4 percent spread between the cost of borrowing and inflation.
Inflation May Help Home Buyers
Secondly, we know that real estate appreciates long term at higher than the cost of inflation. See our article back in May titled “Housing Best Hedge Against Inflation in Uncertain Times”
If housing appreciates faster than inflation, and you can borrow currently at less than the cost of inflation, it makes sense to buy what you can today. This is a great long-term strategy. Unfortunately, most people worry about the short-term. Rising inflation hurts the economy and purchasing power, and this leads to pain in the short-term. The Fed’s mission is to quell demand, and that is true for all spending.
Housing can be hurt in the short-term and this can put negative pricing pressure on homes. Home prices could come down some, but keep in mind we have a shortage of homes being built, and that is getting worse because builders are slowing down building in the middle of a recession. Long-term it will be very hard to keep housing prices down because the demand will be there when interest rate pressure eases.
Some buyers will try to time the market for when home prices fall. The problem with this strategy is if home prices do fall some, interest rates could also rise, which will negate all benefits of waiting. Higher borrowing costs can outweigh any potential price savings. Because borrowing rates are far below inflation, now is a good time to jump on that rate.
We are still seeing many buyers moving to Florida. We are also seeing some buyers moving out of Florida as their employers call them back into work. Remote work has been good for Florida real estate, but that party is ending for some companies.
What will be fascinating to watch will be how many companies decide to relocate to Florida in the coming years. On a regular basis we hear of more and more companies making the move to Florida. While companies may call workers back to the office, more of those offices could be in Florida in the future.
Inflation is hard on everyone. To tamp it down, the Fed is forced to do some awful things. Sadly. Doing nothing is worse than cracking down on inflation, so something must be done. We believe lowering the M2 money supply would do far better than simply raising rates, but this is where we are.
The labor market is showing signs of weakness going forward. Once this occurs, the other obstacle will be the price of oil. Many believe oil could rebound to $150/barrel. This will not help inflation if this occurs.
Inflation adds to the cost of everything, so one day when construction does pick up again, presumably it will be at higher prices due to higher costs. Some commodities like lumber are decreasing, but petroleum goes into so many things like clothing, roofing, roads, etc. The next 30-90 days will be pivotal for oil prices, so keep an eye on that.
Smart Money on Real Estate
The bottom line is, with all the uncertainty out there, real estate may not be a bad bet. Sure, home prices could rise or fall. In the long-term, those that own real estate are far better off than those who don’t. Currently you can leverage today’s rates to increase long-term value.
People always talk about borrowing costs in relation to today’s purchasing power. It might be time to think about long-term purchasing power and how to accomplish that. This moment in time might be that window.
Good luck and Happy Selling!