Can Real Estate Help You Hedge Against Inflation?

Posted on May 16 2022 - 11:00am by Paige Brown
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By Brian Wallace 

2022 has been seeing the cost of goods and services skyrocketing left and right. In fact, inflation is currently at its highest since 1982. Inflation is typically measured by comparing the current prices of goods and services to those before using the Consumer Price Index (CPI), and it appears that this inflation trend will continue for the time being. 

A 6.3% increase in food prices can cost a typical U.S. household about $24 more each month. Investors are usually able to fight against inflation using real estate as rental income increases when property values rise during inflation while mortgage rates remain constant. 

However, inflation does significantly affect prospective homeowners, especially when the majority of the U.S. is facing an underbuilding gap. In the last 20 years, there has been a housing unit gap of 5.5 million, which increases to 6.8 million when considering losses of current units. Between 2020 and 2021, the Case Shiller U.S. Home Price Index rose to 18.6 while about 6.5 million homes were sold, the highest levels since 2006. 

The pandemic is one of the major drivers of our current inflation situation as COVID-19 caused serious supply chain issues that led to a supply and demand crisis. The great slowdown in production due to the global pandemic also affected the national housing and car inventories, reducing them to their lowest levels. 

The housing and real estate industry further experienced rising construction prices and less materials. In fact, the increase of prices of essential building materials like lumber and steel can impact up to 60% of the overall construction costs. Plus, policy decisions have affected quotas and tariffs on steel and aluminum, making it harder to get needed construction materials, while the shortage of skilled workers have increased the cost of labor.

The pandemic saw society shifting to goods-focused demand as well. Stimulus checks helped encourage consumer spending, especially on goods rather than services. People actually increased consumer spending by 2.8% for services and 21.7% for goods during September 2021. However, interestingly enough housing demand did not follow inflation as single family housing starts leapt 31% in the first five months of 2021. 

Nonetheless, it’s clear that the ill-balanced supply and demand during the demand has led to the current inflation crisis. Moreover, 2022 has been showing inflation trends to no longer be “transitory” as there is a high likelihood that the federal government will raise interest rates. From the current standpoint, the future will definitely depend on COVID-19 and its effects. 

As the impact of the pandemic grows less severe, demand for goods and services will eventually balance out, easing pressures on supply chains, while production gradually recovers. However, housing inflation will continue to persist as lumber prices stay on the rise and the demand for housing and building costs both remain high. 

Experts predict that in 2022, there will be at least a 6.6% increase in home sales and a 2.9% increase in appreciation with the caveats of decreasing home inventory and increasing interest rates putting a dent in demand. In this situation, considering real estate investments like commercial real estate (CRE) and real estate investment trusts (REITs) could be beneficial. 

Commercial real estate is a long-term investment with a high barrier to entry while the demand is less steady compared to residential real estate (RRE). A 1% increase in inflation is associated with 1.1% private CRE. In terms of real estate investment trusts, they can own/finance income-producing real estate. 

Even the metaverse has real estate investment options as metaverse revenue is expected to grow each year at a rate of 43.3% through 2027. Although, metaverse real estate is still a new and notional venture that is driven by scarcity, like in the real world. 

During this time of economic volatility, it won’t hurt to consider real estate as your next option. 

real estate and inflation

brianBrian Wallace is the founder and president of NowSourcing, a infographic design agency based in Louisville, Ky., and Cincinnati, Ohio, and works with companies that range from small business to Fortune 500. Wallace also runs a local event to make the Louisville/Cincinnati region more competitive (#thinkbig).

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