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inflation and real estate

Inflation, Real Estate and Interest Rates: The Rise Has Begun!

18 Apr, 2022

Inflation is here. It is a topic of discussion on the news, in Congress and at the kitchen table. Gas has reached a record price per gallon! Inflation is at the highest point in 40-Years! The Federal Open Market Committee (FOMC) met in late March, and as expected started their efforts to fight inflation. The FED increased interest rates for the first time since 2018 increasing the Fed Funds Rate .25% to fight inflation. The FED Policy Statement also forecasted a possible six more rate increases this year, which every analyst expects to happen.

The FED is overly concerned about rising energy costs and other commodity cost, such as wheat, and the impact of the Russia/Ukraine conflict on inflation. Increasing interest rates and reducing the money supply are really the only tools the FED has to use. What does this mean to us?

  • Interest Rates are going to increase this year
  • The FED plans to increase the Fed Funds Rate six more times
  • The FED will reduce pumping cash into the system
  • The FED will slow their purchase of Treasuries and Mortgage-Backed Securities

For the real estate industry, these changes could have a big impact. As an agent or lender, it’s important to be aware of these changes to help navigate your clients in the right direction. For first-time buyers focus on affordability! Rents are rising four-times faster than they did in 2020 according to the Single-Family Rent Index (SFRI). Even with rising interest rates, owning a home is cheaper than rent. Second, for buyers who are paying cash to win the Sales Contract is this the right strategy, or should they take another step? One of the main strategies of effective money managers and Wall Street is to increase their borrowing to fight inflation. Inflation devalues the dollar. The concept is to borrow at today’s lower rates and pay your debt off with future cheaper dollars. In addition, when you pay cash, you are taking two assets, cash, and real estate, and turning them into one asset—real estate.

The more effective strategy to build wealth is Asset Allocation. Pay cash to win the Sales Contract then use the Delayed Financing Plan to recover the cash by redeploying the cash into other investments. In other words, Asset Allocation. You have two assets working for you! Cash and real estate! Inflation is here and we need to offer solutions to our clients to fight it.

About the Author: Rock Vaughan of Fidelity Direct Mortgage is a Mortgage Loan Officer with over thirty years of experience in the industry and is native to the Washington, DC metro area.

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