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Inflation Concerns Explained – How They Affect Real Estate

The Fed is expected to raise short term rates this month b/c employment numbers are adequately strong. But, one area that remains a concern is inflation, or the lack thereof.

The Fed actually desires a little inflation, and they do not understand why there is so little.

The WSJ had an article this morning on inflation with several suggested reasons why there is so little: (1) decreased supply costs – cheap oil in particular; (2) aging demographics – old people buy less; (3) decreased expectations of inflation – so people do not buy now to beat price increases; and (4) a weak world economy.

The Planet Money podcast had another theory: Banks are sitting on trillions of dollars of cash and not lending it out b/c of concerns about the economy and too much regulation. When banks do start lending, the money supply will increase and inflation will surge.

How does this affect Real Estate: When inflation is low, rates are low. This gives buyers much more buying power and it allows them to lock in very low fixed rates.

When inflation is high, rates climb and buyers lose buying power and the low rate opportunity. BUT, real estate, as a hard asset, is a great inflation hedge (it usually appreciates with inflation).

Hence, those of us in the industry can tout Real Estate no matter what the inflation environment is. We can’t lose.

Jay Voorhees
Founder/Broker | JVM Lending
(925) 855-4491 | DRE# 01524255, NMLS# 335646