Inflation broadly impacts the overall economy, causing the prices of goods and services to rise. This can have rippling effects across various sectors, including the real estate market.
Real estate investors, homebuyers, and home sellers need to understand how inflation impacts the real estate market. This can help them make the best decisions when buying and selling real estate.
We’re here to explain what causes inflation, its impact on real estate, and how real estate investors can benefit even when inflation is high.
Understanding Inflation and Its Causes
When your dollars don’t buy as much as they did in the past, it’s because of inflation. An increase in the money supply and debt is the ultimate culprit of high inflation.
Over the years, the central bank has significantly increased the money supply. Because of this, there are more dollars to go around. Ultimately, this means companies selling goods and services can charge more for them, as people technically have more money to spend, although incomes usually stagnate for inflation to happen.
An economy that isn’t growing, or at least isn’t keeping pace with the growth in the money supply, results in inflation. Companies can’t necessarily produce enough goods to keep up with demand, allowing them to charge more for what they can produce.
To keep inflation in check, the Federal Reserve often increases interest rates. This can help reduce consumer spending and lower rampant inflation.
As people spend and borrow less, companies can replenish and build up supplies. However, it can take several years for the economy to neutralize or grow after a period of high inflation.
What Happens to Real Estate During Inflation?
For real estate, inflation typically means you’ll pay more for a home. Your dollars aren’t worth the same amount today as they were last year. So a house that cost $400,000 a year ago could cost $450,000 today. If interest rates are also high, this…