Inflation and its effect on Real Estate
As if the ongoing pandemic wasn’t enough to deal with, we have also all been navigating inflation, seemingly never ending supply chain disruptions, as well as material and labor shortages. And the consumer price index has been on the rise, with the all items index increasing 6.2% over the last 12 months. Clearly, inflation has been on everybody’s mind these days, and it’s no surprise. So, what does this mean for those of us in real estate?
As we know, inflation refers to the rising cost in the price of everyday goods. This means all the materials it takes to build a home, from wood and concrete to drywall and steel beams are more expensive than they were two years ago, by a massive margin. Data show that from August 2020 to August 2021, material costs rose 23.1%. And the effects of inflation don’t stop with homebuilding, but of course, extend to any repairs, additions, or small projects. This makes it harder to make those much-needed improvements and repairs to all real estate properties, be they a primary residence or a rental unit.
Companies of all sizes are facing a labor shortage that results in delayed or canceled orders. This drives prices higher for the goods that are available. In turn, and with surging commodities prices, inflation is more persistent than any of us expected. It’s a vicious cycle. Worse yet, these price increases also have an effect on home pricing in general.
Since the rising cost of homebuilding puts a greater financial burden on builders, they are left with very few options on how to make up for their losses. Namely one, to list just-built properties for much higher prices. This has an impact on the real estate market as a whole, as it automatically eliminates even more people from the pool of potential buyers. Sadly, higher prices aren’t the only reason inflation causes real estate prices to rise. House prices automatically go up any time the Central Bank increases the money supply in the economy, and that’s exactly what happens with inflation.
US landlords provided breaks on the amount of rent they collected during the height of the pandemic, but the era of discounted rents is coming to an end. For many, this can mean up to a 40% increase in their rent at lease renewal, a staggering change most residents cannot afford. And this in turn is terrible news for the Federal Reserve, as it can make today’s speedy price gains last even longer than predicted.
With all of these financial setbacks, it’s difficult to imagine how one can get out of the hole. Many might be wondering if raising rent is the answer. A new law in Colorado, HB-1121 and SB-183, dictates that only one rent increase per year is allowed, so is it really a solution? The answer, we believe, largely depends on a case-by-case basis.
Whether you’re an investor, homeowner, or renter, this can be difficult to understand or manage on your own, but that’s why we’re here! We’re a full service brokerage with a deep understanding of the real estate market and its many complexities. We’re committed to helping individuals with their real estate needs, whatever they may be. Give us a call, we can help.