2022 has been welcomed with a surge in inflation that hasn’t occurred since the 1980s. Prices have risen everywhere, including gasoline, food, and energy. Inflation, which is calculated based on a basket of economic indicators that are established by the Consumer Price Index (CPI), is a trend that will continue to affect our economy for the time being.
Nonetheless, a 6.3% increase in food prices costs an average U.S. household $24 more per month, something that is also happening for other goods and services. Investors usually look towards real estate as a hedge against inflation because property values surge during inflation as rental income rises and mortgage rates stay fixed. However, new homeowners feel the negative impact of inflation as many regions in the U.S. face underbuilding issues. The housing unit gap has risen to 5.5 million in just 20 years even though more people are looking for homes as November 2021 saw more than 6 million homes sold, a level that hasn’t been reached since 2006.
The pandemic causing a supply and demand crisis is playing a big part in driving inflation rates. The pandemic has led to global production shutdowns that resulted in the lowest housing inventory in the U.S. in 2021. In fact, home inventories were only able to provide 4.4 months of home sales and one month of car sales in the summer of 2021, which was about one month’s worth of sales less for both the car and home industries compared to pre-pandemic times.
The real estate/housing industry also saw significant changes in construction material costs as supplies decrease. As prices for materials such as lumber and steel increase, so does the cost of the overall construction process, which is 35% to 60% impacted by the building materials. Policy decisions such as putting tariffs and quotas on steel and aluminum further aggravate the situation while the industry continues to face rising labor costs.
The pandemic has also caused concerns that have led consumers to focus their money more on goods instead of services as federal stimulus checks help boost consumer spending. Consumer spending actually rose to 21.7% for goods and 2.8% for services by September 2021. The poorly balanced supply and demand during the pandemic has led to major inflation rates for commodities (8.4%) and services (3.2%).
Many are starting to view inflation trends as no longer being “transitory.” This means that people could expect inflation to persist for a while and cause the Federal Reserve System to raise interest rates in 2022 and 2023. If the impacts of the pandemic are able to decline, demand for goods and services will stabilize, which will help supply chains relax and production to gradually recover. Although certain policy decisions could decrease material costs, lumber prices are still climbing, meaning that building costs will probably remain high.
The future of the housing market is still uncertain, but inflation coupled with the pandemic-induced supply chain problems could mean that home sales could increase by 6.6% while appreciation rises by 2.9% with the caveats of decreasing home inventory and rising interest rates dampening demand. Nonetheless, real estate investments in areas such as commercial real estate and trusts as well as the metaverse provide a safe bet to hedge against inflation.
Who knows? Inflation could possibly be your next step in combating the inflation crisis.