Inflation is Never Good

 Why Inflation is Bad for The Real Estate Industry

This post will be about how inflation affects the real estate industry.  Whenever there are any economical changes to a nation’s economy, one of the first industries to be effected is the real estate industry.  Inflation is an economical phenomenon that occurs when the general prices (goods, services, commodities, etc.) rise.  Now at first glance this may seem great.  The idea that you can receive more for the house that you are going to sell or more rent  for your rental unit may seem thrilling.  In actuality, it is not.  Upon closer look, you will realize that the purchasing power of the dollar has decreased.  So the reality of the situation is that you could be losing money.

Inflation can be caused by several situations.  The first situation occurs when a nation’s demand for products and services exceeds a nation’s maximum ability to produce the supply.  Economists call this phenomenon demand-pull inflation. The second situation in which inflation can occur is when cost production (land, labor, and capital) increases and suppliers trickle the cost down to buyers.  Economists call this phenomenon cost-pull inflation.  This why big corporate businesses say, “Labor unions are the works of the devil.”

Now, you might ask. How does all of this affect real estate?  It affects the real estate industry a lot. When lenders (mortgage companies, banks, etc.) see inflation, they are savvy enough to know that the purchasing power of the dollar has decrease.  They realize that they may approve a loan for $ 100,000 that they and now it’s worth $80,000 and the person would have to eat the $20,000 difference in value would be them.  So the way that the lender will combat this situation is they increase will increase the interest rates on their loans in an attempt to recuperate some of the loses.

This affects both the sales and rental markets.  The way that it effects the sales market is by reducing demand for buying homes.  The higher interest rates reduce the pool of buyers who are both willing and able to buy a home.  As a result of this, you will have more homes on sales market that would have been sold otherwise.  This in time will reduce the value of homes and cause uncertainty in the market.  If there are less buyers than homes for sale, that means there will be more renters.

The way that higher interest rates affect rental owners is by the amount you will get from a financial institution.  If the lessor has leased a unit for a fixed rent, the lessor will now be receiving less value than they were when the lease was signed.  This will cause the lessor to only agree to leases with increasing rent.  The problem occurs when you have a tenant who is on a fixed income and they can no longer afford rent.  Now the lessor’s rental unit is sitting vacant with the uncertainty of how long it will to finding a good tenant.

So what have we learn about the affect of inflation on the Real Estate Market?

It creates uncertainty in the marketplace.

The next post will be about how “The Fed” combats inflation.

- Auben Realty Improving Augusta One Home At A Time