Fluctuations in the Economy
Economic instability affects our lives on so many levels, real estate investments among them. Since the advent of the pandemic, our economy has seen fluctuations that are more diverse and dramatic than usual.
While the economy practically came to a grinding halt in early 2020 and well into the months that followed, it is now generally considered to be recovering. That is not to say though, that there aren’t going to be many long lasting effects.
Inflation is when the purchasing value of money decreases over time, as prices on goods and services increase. For example, in 2010, the average cost for a Cadillac Escalade was $66,000 dollars, while in 2022, it’s over $76,000.
Everyday goods and services such as food, household items, and car washes have increased as well. Food costs have gone up by a whopping 26% in the past 10 years!
Post Pandemic Economy
In contrast to the economic lockdown in 2020, 2021 brought strong economic growth. The growth was stunted though, by extreme workforce shortages, and very limited supply chains, leading to the highest level of inflation in decades.
The Real Estate Market in particular, has seen its share of oscillation over the past few years. In 2020, mortgage rates were the lowest in decades. This created an opportunity for people to invest at low rates, which in turn led to a limited supply of property.
With current mortgage rates increasing, and so few properties available, what will the effects of increased interest rates and inflation have on existing real estate investments?
Impact on Real Estate Investments
While rising rates often negatively impact bonds, stocks and interest rates on debt, they can actually have a positive influence on real estate investments.
Multifamily properties and other income generating properties can be expected to grow net income during expansionary periods. Because of rising costs on all fronts; materials, machinery, labor and others, fewer real estate development projects are in progress, and less properties are in supply, causing an increase in rent prices.
Additionally, rent prices tend to skyrocket during periods of inflation. Due to increased mortgage rates, buyers have less purchasing power, and therefore continue renting. As housing development decreases, and occupancy rates of existing properties increase, landlords raise rents, generating more revenue. Simultaneously, property values rise.
Lastly, while these economic changes are taking place, the fixed rates of mortgage payments are not changing, but the equity growth is accelerating.
Potential Negative Effects
The negative side of the coin, is that as a result of the economic unrest, mortgage rates are higher to give the banks extra security. This also makes it more difficult to get a loan in the first place, because fewer are being given. That point, in addition to the high cost of building materials, makes new construction a risky investment during inflationary periods.
Vacation rentals are also investments that may be difficult, because when the economy is tight, travel is one of the first things that gets eliminated from people’s budgets.
While inflation and rising interest rates aren’t ideal in general, it doesn’t mean the end of successful investments. While real estate is always dependent on the market and location of the property, even during trying economic times, there are options for highly lucrative and successful investments.