What is Inflation and What Causes It and How Will it Affect Real Estate?
Inflation is a general increase in the price level of traded goods and services. It is sometimes called a rise in prices, which can lead to confusion with deflation, where prices are actually falling.
The definition of inflation is very important in understanding how it will affect you. If prices are rising, then the value of money is falling. If a loaf of bread costs $1 today and tomorrow it costs $1.10, then the value of $1 has fallen by 10%. If you have a $100 in your pocket that will buy 2 loaves of bread today and tomorrow it will only buy 1.
Where can we see inflation today?
Today, we can see inflation everywhere to the point it’s causing everyone to rebuild their budgets. We can see inflation in energy (gas especially), food, clothes, housing, subscriptions, shipping, in 2022 it’s basically everything we use for general day to day living.
What Has Caused Steep Inflation to Occur?
The main cause of inflation is an increase in the money supply. When more money is available, there will be a higher demand for goods and services. As a result, prices go up to balance this new demand with the supply. Quantitative easing by the government for an extended period over the last few years has caused a hyperinflated environment. Inflation is a delayed event and as it occurs it takes large measures to drive it down which starts at the government.
Fuel Affects Everything
With fuel costs on the rise and the US not increasing supply there is a large run-on price for all goods. This affects us all but will be more painful for all the goods that we purchase. If you think about a lot of imports, they use fuel on ships or planes to make it to the US. Then, the goods are taken by truck or another plane to be infused into our supply chain to reach the final destination. Bottomline, when fuel costs go up so do all goods that run through the supply chains.
Does The Federal Reserve have a Plan?
The federal reserve has been increasing interest rates but not fast enough. Economics is by no means an easy topic to understand, however, at this point the only thing that can really be done will be to increase interest rates. This topic becomes comes with heavy controverse as increasing interest rates will cause a significant recession to occur which is already looming. Typically, we have a recession every 8 years, but we are in unchartered territories as we went to 10 years and then had an artificial one in 2020 due to covid. The government than started a long quantitative easing process, but due to the duration this has created a hyperinflated environment of which we have not seen before.
In short, the fed printed a lot of money (infused/monetary easing) and did not slow down until recently and now the fed will need to increase interest rates into an unnatural direction. These actions will cause a significant market pullback (underway) in which just about all market sectors will retract. The recession has really started in June of 2022 and it’s going to get rocky over the upcoming years.
Why do rising interest rates to combat inflation affect the economy?
As rates begin to rise to combat inflation it directly correlates to the markets. The markets move in the opposite direction. The stock market drops quickly when interest rates rise as businesses use debt or borrowing of money to grow their businesses. As rates rise, the cost to borrow money increases and therefore it becomes more expensive for businesses to expand and grow.
In short, higher interest rates cause a rise in the cost of borrowing, which affects corporate profits. It also has an adverse effect on consumer spending as consumers will have to pay more for their mortgages, credit cards, and car loans.
How Will Inflation Affect Real Estate?
There will be a direct correlation to real estate as it’s driven by debt.
When a debt services increase (increase in interest rates) this will drive homes prices down. The affordability of a home at 3.5% interest rate will be very different when rates rise about 6.5%+.
While today the inventory for homes is on the lower end (the mount of houses for sale) this will change very soon as inflation will drive up every aspect of lives, thus folks in Pittsburgh and nationally will look to sell, relocate, downsize, or maybe they just have too many repairs needed on their house. The end state more houses will be for sale, thus creating an influx of inventory in the market at significant lower costs.
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