What is all this inflation about?

While the rest of the real estate world is freaking out about interest rates rising, I want to dive deep into inflation, because it’s something that we should be tracking and understand as it has a big impact on the housing market…

Let’s start with a very basic definition of inflation: As costs of goods go up, every dollar you earn / spend loses value. Therefore, you can’t spend as much as you previously could when goods were less expensive.

So WHAT?” You might be thinking, “Gas and groceries are costing more, but what does this mean for real estate?” Great question!

Let’s talk about what it means for current homeowners

For several reasons, inflation is actually a good development for property owners. The most obvious benefit is the fact that the value of your home tends to rise with the inflation rate. With supply low and demand high, sellers can shoot for the moon with their asking prices and sell for top dollar. BUT, if you don’t want to sell, the great news is that your costs are FIXED! (Your mortgage payment is locked.) So, when everything else seems to be going up in price, your house payments don’t change.

For prospective buyers:

Not surprisingly, the circumstances for buyers in an inflationary market are very different from those for existing homeowners. Houses are costing more, and money is costing more. So, the most important factor this group must consider is timing and goals. We always ask our buyers, “How long do you plan to own the prospective property?” If you are in it for the ‘long haul’ (5 years or so), you should expect the same value increases that existing owners are experiencing. If you are looking at a short time horizon — renting might make better sense OR buy something that you can rent after you move on.

You may be hearing the term, “Hedge against inflation…” What does this mean?!

Historically, investors like to park their money into real estate during times of inflation as a “hedge against inflation.” This is because houses have historically appreciated at a higher rate than many other asset classes and even more so during times of inflation, especially considering that your costs (mortgage) will remain fixed. The housing market tends to be much less sensitive to short term outside influences than are other assets. Any of you lost money because a tech billionaire tweeted? Yeah, houses won’t do that to you!

So what’s NEXT?

As we map out the Bay Area Market’s near- and long-term future, it is hard to forget the ghosts of 2008’s housing bubble. While a market decline is difficult to predict, it’s worth noting that there isn’t much data suggesting one is imminent. (AND I want to highlight that the Bay Area survived it better than just about every other market in the country.) For starters, the current asset market is vastly different from what we saw in 2008, right before the Great Recession. Although labor is in short supply, the economy is growing, unemployment remains low and optimism remains high as reopening efforts continue and better opportunities emerge. (I am super optimistic of SF opening!)

While we MAY see home prices stall, my gut says they will still continue to increase – for the basic reason of supply and demand. The supply here in the Bay Area is still far below the demand, without any signs of changing. And, when focusing on the big picture, a 1% increase in interest rate does not alter things in a significant way. For example: For a $1,500,000 home, the yearly difference in a 3% rate vs a 4% rate is: $1000/month or $12,000/year. While that may seem like a lot (and, don’t get me wrong, I would love an extra $12,000 if anyone is offering!), when you compare it to the $1,500,000 purchase price, it’s less than 1%. At the end of the day, the Bay Area still has plenty of financially stable buyers and limited room to build homes.

Written by: Cynthia Kellogg

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