Real Estate

Inflation and Real Estate

How inflation will impact our local market

You have probably heard or read about the impact inflation is having on our economy. Everything seems to be increasing in price. In fact, in 2021 we saw the largest increase in the Consumer Price Index in over 40 years, rising 6.8%. CPI measures the changes in prices paid by households for goods and services. Often inflation moves relatively slowly and mostly goes unnoticed year over year. It’s when you take a step back and remember what things used to cost many years ago that all of a sudden we grasp how inflation works. For example, when I was in high school, a Big Mac meal at McDonald’s was $2.99 (I graduated in 2002). Right now, that same meal is $9.50! Over the course of the last few decades our economy has seen a few ups and downs to say the least, but inflation has been relatively steady up until the big jump in 2021. How will inflation affect our local real estate market? The short answer is more of the same regarding competition, as inflation will bring additional buyers looking to hedge against inflation in a couple of manners.

How would someone use real estate as a hedge against inflation? There are a couple of ways, going back to what I have been telling my first-time homebuyers for a few years. If you’re renting or have rented in the last five years, remember what your rent was in 2017? Would you prefer to be paying your 2017 rent or your rent today? When you purchase a home using a fixed-rate mortgage you are essentially locking in your housing payment for however many years you are financing your home. To be clear, your taxes and insurance costs can and do change, but the overall effect on your payment is negligible. The idea here is that taking on debt today is good, because inflation will eventually cause wages to increase, and you will be servicing your debt with “inflated dollars.” These inflated dollars will allow you extra savings and wiggle room to help with the inflated costs of goods and services. Simply put, you are locking in your largest liability (for most) and allowing yourself to take advantage of the rising housing market as well positioning yourself well against inflation.

The other aspect of inflation that will impact the housing market will be from investors looking to pull money out of a volatile market. During inflationary periods, investors tend to favor the asset classes over the more influx markets. Housing appreciation has been outpacing inflation consistently over the last 50 years. The only times inflation outpaced home appreciation we experienced recessions, such as in the early 1980s and the late 2000s, and even then, it was very close! In the 2010s inflation was 1.8%, versus home appreciation of 4.9% for the decade. The last two years the gap has grown significantly. In 2020 inflation was 1.4% vs 9.2% home appreciation, and 2021 the gap widened even more, at 6.8% inflation versus 18% home appreciation, according to the National Association of Realtors. The logic here is like what I wrote above: about locking in debt payments, except now as inflation and home appreciation both influence rents, rents will continue to increase. The debt will be serviced with rising rents from inflated prices which will allow investors' monthly cashflow to increase as well. Unfortunately, this new inflationary period will continue the sellers’ market we experienced during the low rate/COVID periods over the last few years.

HOME PRICE ROUNDUP

Photos and listing info from Central Oregon Multiple Listing Service

MID: >>

1221 SW Bryanwood Place Bend OR 97702 $869,000 This 1,815 sq ft home has 3 bedrooms, 2 bathrooms on 5,227 sq ft lot Built in 2017 Listed by Carol Tobey of Harcourts the Garner Group Real Estate

<< LOW:

836 SE Douglas St Bend OR 97702 $450,000 This 1,036 sq ft home has 3 bedrooms, 1 bathroom on a 6,970 sq ft lot Built in 1978 Listed by Clair Sagiv of Windermere Central OR

<< HIGH:

60475 Sunset View Drive Bend OR 97702 $3,599,000 This 5,185 sq ft home has 3 bedrooms, 5 bathrooms on 2.23 acres Built in 1994 Listed by Kirk Sandburg/Mitch Albertson of Windermere Central Oregon

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