All things real estate: How future inflation can affect home prices

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First off, I want to let everyone know that no matter what you read about doom-and-gloom scenarios, currently there is no bubble in the real estate market. I have conveyed this many times: Our inventory is at an a historically low level. However, the No. 1 reason that prices went up to high single and double-digit percentages in 2020 was the Covid-19 pandemic as well as the lowest mortgage rates in 50-plus years adding to the feeding frenzy of purchasers.

Also contributing was the temporary shutdown of our markets and then the insane pent-up demand that exploded in buying homes during the second and third quarters and beyond from those leaving and escaping New York City due to Covid.

Our government is in a vicious cycle of printing trillions of dollars to invigorate our economy through the first stimulus checks in 2020 as well as PPP loans and grants through the Small Business Administration. Now the second stimulus package of $1.9 trillion called The American Rescue Plan Act of 2021, also called the COVID-19 Stimulus Package, was passed by the Senate last month and President Biden signed it into law. It appears for the short term this will obviously assist many who are either unemployed or whose businesses were greatly affected by the turndown in our economy in 2020 and even in 2021. The millions who were laid off and who are still unemployed (although employment is improving greatly) are getting a second shot in the arm, but will it be enough? Who will be paying it all back, us and our grandchildren and those yet not born?

I am torn between agreeing with the stimulus and not agreeing with it for several reasons. The sheer immensity of the additional trillions added to our national debt has escalated more in the last four years of the Trump presidency compared to the eight years of the Obama presidency. But this new increase is pushing us into a new territory of debt, but what other choices do we have? There is the need to create jobs through the infrastructure bill as well as cover other much-needed expenses. I am not pointing fingers but just stating facts. It is what it is and now we will be adding that much more to what we already owe.

What if interest rates were to continue to rise, while our currency becomes diluted, so one would need more dollars to pay for things, thereby decreasing purchasing power, which is called inflation? Do you know what it will do to our national as well as our international debt? It will add trillions upon trillions in higher interest payments, which will create what I would call an unsustainable debt crisis, which I believe we already have. However, landlords will benefit because if and when mortgage rates increase, causing more not to qualify, then more buyers will look to renting as the only option for a longer term, increasing demand and raising prices. Unfortunately, history does repeat itself as we don’t always learn from our past economic misfortunes and mistakes. It appears we have been kicking the ball of debt down the road for many years and not owning up to the reality of what is currently staring us smack in the face.

When President Clinton left office, he left George Bush $500 million in the bank, and we were a creditor nation. Unfortunately, it was all spent plus another 2-plus trillion on a bunch of unnecessary wars. We had the opportunity to squirrel that money away to do what we are trying to do today, rebuilding our infrastructure, which would have cost much less back then than today. On the positive impact side, moderate inflation causes greater cash flow, but on the negative side it increases the discount rate used to gauge the present value of future cash flows. Higher discount rates cause the market to devalue assets with future cash flows, and the further out they are, the more detrimental the impact.

How inflation affects a specific asset depends on the cash flow and the increase in the discount rate in determining the future returns. Real Estate rentals should do quite well. Growth stocks will not fare as well in an inflationary environment, but value stocks will do better in that type of environment. However, there will always be exceptions to every situation especially with new industries being created, e.g., electric cars, battery storage, wind and solar power, low carbon energy substitutes, new medicines.

Unless housing inventory becomes inflated above the normal 6-7 months, which is always a possibility 3-5 years from now, prices shouldn’t crash. Also, the demand and interest rates will be the determining factor in how our market vacillates up or down in the future. But because there are millions entering the market each year, builders have not been able to keep pace with the demand. Some predict a small increase in inflation, while other pundits are suggesting much worse consequences of potential hyper inflation due to all the stimulus monies being printed and handed out.

As demand goes down for purchasing with higher interest rates and inflation kicks in, then prices will potentially decrease as construction will also slow due to higher costs. If one spends more than they take in, which will be occurring, what is the eventual result, a work-out plan by continuing to print money or worse case scenario bankruptcy? I am praying and hoping that the latter two scenarios — hyper inflation or bankruptcy —are wrong; but the $64,000 question will be how do we pay back all the money that we owe?

Philip A. Raices is the owner/Broker of Turn Key Real Estate at 3 Grace Ave Suite 180 in Great Neck. He has 39 years of experience in the Real Estate industry and has earned designations as a Graduate of the Realtor Institute (G.R.I.) and also as a Certified International Property Specialist (C.I.P.S). For a “FREE” 15 minute consultation, a value analysis of your home, or to answer any of your questions or concerns he can be reached by cell: (516) 647-4289 or by email: Phil@TurnKeyRealEstate.Com Just email or snail mail (regular mail) him with your ideas or suggestions on future columns with your name, email and cell number and he will call or email you back.

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