In the first of this series of articles, I referenced two previous issues to express my conviction that wage inflation will be a significant element in our post-pandemic economy. For a first time read or refresher, please Click Here for Part 1 and Click Here for Part 2.
Wage Inflation & 3 Inflationary “Wild Cards”
Worker shortages are currently a major problem for certain industries. If those shortages last longer than expected, wage growth will be on a fast-track that will force businesses to pass some, if not all, of these costs on to consumers. Price increases trigger inflation.
Additionally, there are at least 3 “wild cards” that may drive the potential for inflation in the New Year:
- Long-term effect of the $1.9 trillion American Rescue Plan enacted earlier this year;
- Final structure of the Build Back America plan - currently debated at $2-4 trillion price tag;
- Resurgence of covid-19 and variants … labor shortages, and additional stimulus may result.
Residential Real Estate Prices & Mortgage Interest Forecasts – 2022
Many industry experts claim that our historic stretch of unprecedented home price increases will not abate in the coming twelve months. The underpinnings for that forecast is supply and demand, i.e. a tsunami of first-time millennial homebuyers coupled with a decade of reduced home-building.
The consensus of those maintaining this position is that price hikes and bidding wars will be ongoing during 2022. Here are expectations voiced by two industry insiders:
- Mortgage Bankers Association: Foresees a median price increase of existing homes at 15.3% in the first quarter of 2022.
- Zillow Research: Predicts a 13.6% growth in home prices in the coming twelve months.
The recent CPI report of the yearly rate of inflation increase to a 31-year high of 6.2%, has increased the odds that the Federal Reserve will raise interest rates to corral inflation. That’s in stark contrast to the Fed maintaining record low rates to ease the economic crisis caused by the pandemic.
Here’s two forecast assessments for the average 30-year fixed mortgage rate:
- The Mortgage Bankers Association forecast a significant increase over the current rate of 3.09% to 3.7% by Q3 2022, and 4% by year end;
- Fannie Mae projects a more conservative, albeit substantial, increase to 3.4% by the end of 2022.
Takeaways
Current and prospective inflation must be considered as drivers in residential landlords’ decision making. While the foreseeable economic landscape presents a vision of inflation, alert real estate investors may profit in the near-term. Specifically, now is the time to consider borrowing money to purchase or refinance an investment property and lock in 30-year fixed rates that are still at historical lows.
Coupled with anticipated inflation, borrowers are rewarded in paying lenders back with money that is worth less than it was when the loan was originally granted. Said another way, inflation reduces the true cost of borrowing since the “real” interest rate is the nominal rate charged by the lender minus the inflation rate.
Click here for a more detailed discussion of this benefit.
In addition to this “plus” in leveraging your investment, inflation is likely to deliver further benefits to landlords:
- rent increases driven by wage inflation;
- increase in the number of quality renters who are blocked from home purchases by escalating prices;
- bump in the asset value of your residential rental.
Of course, please let me hear from you to share thoughts and insight.
At KRS Holdings, we stand by our core principles: Successful property management is based on simple math: Add value to your assets, subtract unnecessary expenses.
Give us a call or drop an email. We’ll respond promptly to relieve
your stress and help you evaluate your property management options
plus maximize your rental property return on investment.