Inflation and Real Estate in Temecula


Filed under: The Temecula/San Diego Market

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As you would expect I get asked regularly about what direction I believe interest rates are headed.   Whenever someone asks I immediately put them on hold, reach behind my desk, grab my crystal ball and get the most up to date prediction for any particular time period…yeah right!

Don’t I wish I had a crystal ball?  In the absence of that I’m left looking at economic data that has potential to move interest rates.  Inflation
reports are some of the most important bits of economic reports that affect interest rates.  Some of the biggest reports on inflation are GDP deflator, Consumer Price Index (CPI), and Producer price index (PPI).  I always know if these reports are coming up and I’m looking to help clients make decisions on whether to lock a particular interest rate, or whether the timing is right to refinance based upon this news.

But why is inflation so important to interest rates?  It’s actually fairly simple.  Keep in mind that fixed rate mortgages are ultimately funded through the sale of mortgage backed securities, which are a bonds that investors purchase for the fixed interest rate the bond yields.  If you purchase a mortgage backed security it might yield 4.5% annually for the life of the investment.  In inflationary times you will have to pay
more money to purchase the same items. If you have a fixed yield, but you pay more for the same items, your purchasing power is diminished, so you can’t agree to a 4.5% yield.  Now maybe you need a 5.5% yield to purchase the same items.  The need for an increase in yield results in an increase in interest rates.

What to watch out for.  Keep in mind that improving US and global economies means there will be greater demand for supplies.  The simple supply and demand relationship tells you increased demand will almost always result in an increase in prices (inflation) when there are any limits on supply, which is generally the case.  Based on this relationship, we can assume inflation will increase with an improving economy.  Add to that the fact that huge investment banks are also driving prices up through speculation and you end upwith very real inflation.  Welcome to today’s increasing food costs, oil over $110/ barrel, and $4/gallon gas.  By definition, that’s inflation and it’s hitting us all in the wallet.

Everyone that is sitting on the fence trying to decide on purchasing or refinancing a home (primary residence, second home or investment
property) needs to consider inflation when deciding on timing.  The Feds are working hard to keep inflation within their target range of 2.5% annualized, but this is going to be a huge task.  You will be hard pressed to find any “expert” on economics that doesn’t think inflation will be a problem in the coming years.  You can add me to the group that feels inflation is going to be a persistent issue in the coming months and years.

Obviously there are considerations other than inflation when making real estate moves.  I invite all questions.  Please feel free to get in touch any time.


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