Inflation has a Huge Jump – What Does it Mean for Real Estate?

Filed under: Market Comentary

Inflation is kicking in – does it matter? I’m talking about this topic in today’s video because of the Consumer Price Index (CPI) report this morning. The numbers were 3 – 4x of expectations, and those expectations were already higher than normal.

Year-Over-Year Inflation

Keep in mind that the comparison for year-over-year numbers is in the middle of the shutdown in 2020, which makes the comps pretty bad. So, we knew it was coming. But when it comes out this much higher than expected, that’s when we start questioning what is going on.

Inflation means that you need to spend more money now compared to the cost in the past. Why does this matter to real estate? Remember that what drives interest rates is fixed-rate bonds (mortgage-backed securities and longer treasuries).

Last year, the yield on the 10-year treasury was hovering around 1%. If inflation comes in at 4%, then it means that you lose 3% on your investment. If inflation is going up, it makes the fixed-rate bonds less attractive – which means that people don’t want to buy them. So, there’s motivation to offer a higher return on bonds, which equals higher interest rates.

Why Should We Worry about Inflation?

What worries me is that a large part of the fuel in the real estate market has been around interest rates. If rates start to increase, what impact does that have on the market?

Some people would argue that the market could use a bit of cooling. But there are a lot of other interesting headwinds that could get involved. It’s important to understand what the moving parts are and how they will likely impact the real estate market going forward.

We’re seeing it a little this morning with movement driving rates up today. Who knows what will happen in the future, especially since we’re expecting an even higher inflation report next month. It’s no surprise, especially as we’re seeing the news headlines that show how everything is getting more expensive: lumber, groceries, gas, and more.

What are your questions and thoughts on this topic? I’m always here to discuss the best strategies to help you maximize your mortgage. Reach out any time.

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