What are the root causes of inflation and how does it relate to Real Estate? No, this is not a political post; rather it is my attempt at a simplified explanation of what causes “inflation” and how it effects the Real Estate Market. The post was inspired by many people asking my thoughts on what will happen to the Real Estate Market. Not wanting to give an off the cuff answer that I do not have a crystal ball, I thought a more beneficial look would be to write this post.
We all see it at the gas pumps, the grocery stores and the list goes on and on. So, how does “Inflation” relate in terms of real estate? Milton Friedman explained it years ago when he said “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output”. (If you are not familiar with the Nobel Priced Economist, please Google his name and you will discover a wealth of information.)
Friedman passed away in 2006. Yet his theory influenced the Federal Reserve’s monetary policy in response to the global financial crisis of 2007-2008. Ironically, he was right as his theory of monetarism suggested that the Central Bank’s policy should be aimed at keeping the money supply at a rate commensurate with the growth of productivity and demand for goods.
With that said, the Government only has three ways to fund, or operate, itself: (a) raising taxes, (b) borrowing money, and/or (c) printing money. What does this do? It diminishes the value of money, hence as the price of money falls the price of every other commodity must go up. Hence, we have Inflation.
As mortgage rates rise during the ‘inflationary period’, the demand for real estate tends to decline in the short term as debt becomes more expensive and unaffordable. This short-term result of the weakening of demand reduces prices because there are still sellers who need to sell. In the long-term, real estate becomes a safer place to have your money. WHY? Because the monthly mortgage payment is fixed for the long term.
Developers cut back on building due to ‘inflation’ because of higher labor and material costs. Interestingly, this causes fewer homes to be on the market, hence prices can climb again. Income-generating real estate, such as duplex and other multifamily properties, show a net growth of income almost immediately as first time buyers are eliminated from purchasing properties and hence are forced to rent.
In summary, if you notice your stock portfolio shrinking, you may want to consider moving some of that money into real estate. In the long-term real estate has always been a hedge against inflation.
Wishing you a safe and healthy life and I look forward to your comments. If you are looking for a knowledgeable, focused and goal-oriented Realtor in the Beverly Hills area who will help you achieve your Real Estate goals, please reach out to me directly! If you are looking for a pet friendly Beverly Hills Realtor who can handle and sell the most difficult properties that no one else could, please reach out to me directly!! If you are considering buying or selling a home, a luxury home, luxury investment real estate, luxury vacation homes, or luxury beach properties in Southern California, Los Angeles, Century City, Westwood, West Hollywood, Beverly Hills, Marina Del Rey, Venice or Malibu, feel free to contact me at 310.486.1002 ( m) homes@endrebarath.com or visit one of my websites at https://www.endrebarath.com I contribute a portion of my commission to local animal rescue organizations. Endre Barath, Jr. Realtor at Berkshire Hathaway HomeServices California Properties DRE#01238708
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