Inflation in 2022, which can be compared to the one back in 1982, is affecting all parts of our lives. Prices everywhere are skyrocketing, especially the cost of services and goods in the food, oil, and gas industries. Although a 6.3% rise in food prices can cost a regular U.S. family more than $24 each month, how does inflation affect sectors such as real estate?
For investors, real estate usually allows them to combat inflation as rising property values result in a growing rental income. Unfortunately, those who are looking to buy their own house do not benefit in a similar way. Instead, inflation causes house prices to rise as less homes become available on the market. Due to this, the seller’s market is doing better as 2020 and 2021 saw the highest levels of homes sold since 2006 with a Case Shiller U.S. Home Price Index showing an 18.6% increase in housing prices.
The COVID-19 pandemic caused a supply and demand crisis that has led to shutdowns around the world and resulted in the nation’s housing inventory reaching a record low. Home inventories before the pandemic were able to provide almost 6 months of sales but 2021 saw inventories only being able to sustain around 4 months of home sales. A month’s worth of car inventory was also unavailable in the summer of 2021.
The rising prices associated with construction and the lack of supplies caused by inflation have also affected the housing and real estate industry. As the cost of building materials like iron and steel increase, so does the total construction costs, making it more expensive to build new structures. These rising costs are also affected by policy decisions such as putting tariffs on metals and failing to extend a softwood lumber agreement with Canada. Additionally, the industry is experiencing a shortage of professionals, which is causing labor costs to grow.
The pandemic has led many to demand more goods instead of services, resulting in consumers spending 21.7% more on goods compared to before the start of the pandemic. Consumer spending is also supported by COVID-19 stimulus checks. The poorly balanced supply and demand within the country has resulted in high inflation rates with commodities reaching an inflation rate of 8.4% and services experiencing a 3.2% inflation rate as of October 2021.
The effects of inflation will most likely prevail throughout most of 2022 and possibly into 2023 due to how high it has gotten. The future of America is heavily dependent on how quickly the impacts of the pandemic decline as the faster we can recover, the faster the demand for goods versus services can go back to normal and ease supply chain pressures while production can improve. Nonetheless, housing inflation will still persist as demand and building costs are predicted to both remain high.
The housing market in 2022 will continue to display characteristics of a seller’s market with a predicted increase in both home sales and appreciation but with the caveats of small inventory numbers and struggling demand due to rising interest rates. During this time, investing in real estate such as commercial real estate (CRE), real estate investment trusts (REITs), and even metaverse can be a good move due to real estate’s resilience to inflation by getting returns from income and appreciation.
As inflation continues to affect our economy in 2022, many might consider taking the next step in real estate.