What are the root causes of inflation and how does it relate to Real...

By
Real Estate Agent with Berkshire Hathaway HomeServices 01238708

www.endrebarath.com

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.

www.endrebarath.com

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.

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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.

 

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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

Comments (29)

Brian England
Arizona Focus Realty - Gilbert, AZ
MBA, GRI, REALTOR® Real Estate in East Valley AZ

Your explanation is good and it is pretty simple but I don't think the politicians care about anything other than their pockets getting fatter while they are in office.

May 20, 2022 05:56 AM
Anna Banana Kruchten CRS, Phoenix Broker
HomeSmart Real Estate BR030809000 - Phoenix, AZ
602-380-4886

Endre you summed it up and made it very simple to grasp the concept inflation. And you kept it 'clean' which is probably more than I would have done.  Milton Friedman was a very smart guy.  I hear him quoted quite often recently on the biz shows I listen to. I have seen a slight shift in our market with inventory up higher and prices are leveling off  a bit. We could very well be headed to a more balanced market and thankfully we still have plenty of buyers moving here from out of state.

May 20, 2022 09:57 AM
Troy Erickson AZ Realtor (602) 295-6807
HomeSmart - Chandler, AZ
Your Chandler, Ahwatukee, and East Valley Realtor

Great post Endre Barath, Jr. You have a great way of explaining things and relating them to real estate.

May 20, 2022 11:45 AM
Sheri Sperry - MCNE®
Coldwell Banker Realty - Sedona, AZ
(928) 274-7355 ~ YOUR Solutions REALTOR®

Hi Endre,

Great discussion on inflation. Most people don't understand economics which is disconcerting. I have seen a lot of buyers who have pulled their money out of the stock market to buy a second/vacation home here in Sedona.  Many bought short-term rentals to hedge the market. 

May 20, 2022 01:24 PM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Endre good job on your attempt to not make this blog political, but I will not be as diplomatic as you.  The cause of the present inflation is the result of all the idiotic decisions the present administration is make, and then trying to blame it on everyone else, instead of correcting their idiotic decisions.

May 20, 2022 04:09 PM
Ray Henson
eXp Realty of California, Inc. (lic. #01878277) - Elk Grove, CA
Realtor

The firs economics book that I ever read was Friedman's, Free to Choose.  He is probably the biggest reason that I majored in Economics at Davis.  We need many more economists like him.  We have had Federal policies and Monetary policies that have put the peddle to the metal.  It will be interesting if the Fed can slow this all down without even more major disruptions.  I am doubtful.

So I just sold a house and have to figure out where to put the money.  Maybe it will be another house, but there is this old saying, buy when there is blood in the streets.  And the stock market has been pretty bloody this year.  Do you think it is still too early?

May 20, 2022 05:09 PM
Marte Cliff
Marte Cliff Copywriting - Priest River, ID
Your real estate writer

I don't think anything the fed does with the money supply will curb the inflation that is hitting people hard right now: groceries and gasoline.

Every thing we buy that has to be shipped into our markets costs more simply because it costs more to get it to us. We need to take the shackles off the oil industry.

May 20, 2022 09:08 PM
Rain Silverhawk
Sandpoint Realty rain@lakeandhomes.com - Sandpoint, ID
208-610-0011 Sandpoint Idaho Real Estate Realtor

good simple explanation Endre.  Kudos

May 21, 2022 12:29 AM
Dorie Dillard Austin TX
Coldwell Banker Realty ~ 512.750.6899 - Austin, TX
NW Austin ~ Canyon Creek and Spicewood/Balcones

Good morning Endre,

Finally! A good discussion on inflation. Milton Friedman was a smart man. We are seeing inventory increasing and prices leveling off some (depending on the price range) but so many moving here we still don't have the inventory needed to keep pace with the growth. Excellent post..why not forward this to Washington. They could really use a refresher course!

May 21, 2022 04:06 AM
Peter Mohylsky. BRIX REALTY
Miramar Beach, Florida - Santa Rosa Beach, FL
BRIX REALTY -DESTIN

great discussion of a very complex subject.

May 21, 2022 06:00 AM
John Pusa
Berkshire Hathaway Home Services Crest - Glendale, CA
Your All Time Realtor With Exceptional Service

Hello Endre Barath, Jr. great detailed explanation for the root causes of inflation.

May 21, 2022 08:45 AM
Curtis Van Carter
Better Homes & Gardens Wine Country Group - Yountville, CA
Your Napa Valley Broker Extraordinaire

Endre

Only you would take this subject on. Your being here in CA, you know what we are paying for everything including gas. My cousin in Georgia almost chocked when I told him gas was over $6/gallon. cheers cvc

May 21, 2022 09:34 AM
Will Hamm
Hamm Homes - Aurora, CO
"Where There's a Will, There's a Way!"

Hello Endre and thanks for sharing this great information with us here in he rain.  Make it a great Saturday!

May 21, 2022 11:15 AM
Fred Griffin Florida Real Estate
Fred Griffin Real Estate - Tallahassee, FL
Licensed Florida Real Estate Broker

Hi, Endre Barath, Jr. 

      I have several books by Milton Friedman on my shelf, including Capitalism and Freedom, and Free To Choose.  The man was brilliant.  Thanks for bringing him to the forefront in your excellent analysis of what is going on.

May 21, 2022 07:56 PM
Paddy Deighan MBA JD PhD
federalfinanciallawgroup.com - Vail, CO
Paddy Deighan J.D. Ph.D

the pundits are pushing gold and silver and they have been doing so for the past 12-14 years....yet real estate is and was the best investment and you can live in it too!!!

May 22, 2022 03:56 PM
Beth Atalay
Cam Realty and Property Management - Clermont, FL
Cam Realty of Clermont FL

Good morning Endre Barath, Jr., great, clean explanation of inflation.  I see many investors purchasing rental homes in long and short-term rental areas, not much confidence in stocks. Real estate has always been a good investment.

May 23, 2022 05:30 AM
Aura Alex
CloseMyDeal, LLC - Seattle, WA
Need A TC? Virtual TC Services Nationwide

I'm glad you said it's not about politics. I hate politics and the "blame game" that usually goes around to the opposite political party. 

We all know that real estate goes through a bell curve every seven or nine years. The essential things for an average investor (stock or real estate investment) are to understand how to move our hard-earned money and learn to recognize the opportunity, and make an intelligent move. 

I am more concerned about other ways to invest in real estate, especially during this "inflation" period. I'm still looking for that "killer deal!!"

May 23, 2022 12:00 PM
Adam Feinberg
Elegran - Manhattan, NY
NYC Condo, Co-op, and Townhouse specialist

A few years back, my director held a sales team meeting and we spent the better part of an hour discussing what he and I thought would be a long run of upcoming inflation with rising housing prices. We were a small sales team, my director and I were the only ones in the team with a financial background (and we both worked for Investment Banks prior to moving into real estate). I whole heartedly agreed with all the points made- and I have been advising clients on these structural issues for years now. This was long before Covid which really threw the Manhattan market off for awhile, but the long term call remained the same. It's easy to point the finger at whichever politician is in office..but the truth is, we have been building toward this inflationary environment for many years. Technology allowed us to flip the script for a long time, but it's impossible for inflation to be held at bay  in perpetuity.  When I was 14 years old I was earning $2.35/hour as a busboy (plus tips)...but it's scary now that I am in my late 40's and the hourly wage has remained nearly unchanged for 30+ years...that's not healthy.

I have been fortunate to have proximity/connection to a total of 4 Nobel Laureate's in Economics over the course of my career when I was in finance...sort of by chance, but not really- and while I am grateful for the rather colorful experiences I had in finance, I grew to realize that I was ready to start on a different career, but not too far removed- where I could still leverage some of my background in finance/economics. 

May 25, 2022 08:49 PM
Patricia Feager, MBA, CRS, GRI,MRP
DFW FINE PROPERTIES - Flower Mound, TX
Selling Homes Changing Lives

Endre Barath, Jr. - this is an outstanding explanation on inflation, how it works, and why. You simplified the big Why with intelligence and an easiness to comprehend. We are living through the greatest example of inflation that I ever seen! 

When it comes to this type of inflation happening so spontaneously, all I can say is we are crossing over into a different world whether we like it or not. 

May 31, 2022 01:13 PM
Joe Jackson
Keller Williams Capital Partners Realty - Columbus, OH
Clintonville and Central Ohio Real Estate Expert

This is an excellent post with great information. Thanks for sharing it.

Have a super fantastic week!
Joe Jackson, Realtor-KWCP

Jun 27, 2022 09:04 AM