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Article written by Lester Caplan, President American Valuation Company,
California State Certified General Appraiser
It is well known that inflation has a great impact on the real estate market. The impact of inflation can be seen in the prices of homes and other residential properties, as well as the overall health of the real estate market. In this article, we will take a look at how inflation affects the residential real estate market and how it can be a tool for protection in the ever-changing real estate market.
Inflation is an economic term that refers to the increase in prices of goods and services over a period of time. This phenomenon is most commonly measured by a country's consumer price index, which is a measure of the increase in average prices of a basket of consumer goods and services in a given year. Inflation has a direct impact on the residential real estate market, as it affects the prices of construction costs, re-sale home market, rents, and other residential properties.
Inflation is an economic phenomenon and is if kept under 2% its generally considered to be a healthy sign of economic growth. However, it can also have a detrimental effect on the residential real estate market, as rising prices can create an unaffordable housing market for many people. This is why it is important to understand what inflation is and how it affects the residential real estate market in order to make informed decisions about investing in the real estate market.
Before we can dive into the effects of inflation on the residential real estate market, it is important to understand the different terms and definitions related to inflation.
The consumer price index (CPI) is a measure of the prices of a basket of consumer goods and services in a given year. It is used to measure changes in prices over time and is often used as a measure of inflation. CPI is calculated by the Bureau of Labor Statistics and is used to measure the change in prices of a variety of goods and services, including food, housing, clothing, transportation, and energy.
The housing market is a term that refers to the buying and selling of residential real estate. This includes new homes, re-sale homes, condos, townhouses, and other residential properties such as vacant land zoned for residential use. The housing market is affected by a variety of factors, including inflation, population growth, supply & demand and economic conditions.
Inflation protection is a term that refers to the ability of an investor to protect their investments from the effects of inflation. This can be done through investing in assets that increase in value equal to or above the inflation rate. over time. Assets such as stocks, bonds, and real estate can be a great way to protect your investments from the effects of inflation, as real estate prices most often tend to rise with inflation if there is strong demand for real estate due to demographic changes and supply deficiency due to lack of building supplies, labor shortages and scarcity of land available for development.
Now that we have a better understanding of the terms and definitions related to inflation and the residential real estate market, let's look at the facts about how inflation affects the residential real estate market.
First, it is important to understand that inflation has a direct impact on the prices of homes and other residential properties. This is due to the rising cost of financing, goods & services and fuel needed to develop and purchase real estate. As inflation increases, often the prices of homes and other residential properties increase greater than other commodities. However, this means that the cost of living in a particular area can become unaffordable for many people, and as the prices of housing increase, they become unable to afford housing.
In addition, inflation can also have an impact on the availability of housing. As inflation increases, rents also increase faster than real estate sale due to a shorter turn-a-round and less long-term commitment. So, the demand for housing available for purchase can become a shortage of housing supply. This can lead to an increase in prices greater than the general inflation rate, as the demand for housing outstrips the available supply.
Finally, inflation can also have an effect on the mortgage market. As inflation increases, interest rates tend to rise as well. Recently interest rates have been at historical lows. People with an existing low mortgage rate become less willing to sell their home since they would not have as favorable mortgage terms available. This can add more strain to the supply of available homes for sale and increase supply shortages. On the other hand, it also makes it more difficult for people to qualify for a mortgage. As the debt-to-income ratio increases lenders tend to be more cautious when providing loans in an environment of high inflation.
In conclusion, it is clear that inflation has a great impact on the residential real estate market. Rising prices can make it difficult for people to afford housing and can create a shortage of supply. In addition, inflation can also lead to higher interest rates, making it more difficult for people to obtain a mortgage.
It is important for people to understand the effects of inflation on the residential real estate market that they wish to invest in to make informed decisions about investing in the real estate market. Investing in real estate can be a great way to protect your investments from the effects of inflation, as real estate prices tend to rise with inflation.
For more information about inflation and its effects on the residential real estate market, it is important to speak with an experienced real estate professional. Call Lester Caplan, President of American Valuation Company, CA State Certified General Appraiser, to get more insights into how inflation affects the residential real estate market and how it can be used as a tool for protection in the ever-changing real estate market.