There is a lot going in the U.S especially in the US economy. And whatever happens in the economy has an impact on real estate investors.
Let's shed some light on inflation, employment and retail sales and see how it is affecting a real estate investor like yourself.
Every investor keep track of inflation as it decrease the value of money over time. Inflation is becoming a real deal these days as it is going up and is currently higher than ever. The cost of goods is constantly going up and consumers hate it because they are constantly losing money.
For instance your favorite burger cost $12 and you have $12. You can buy your favorite burger. But then the prices goes up and your favorite burger now cost $17 instead of $12. and $17 is more than you want to pay and your $12 is equal to two third of the price of the burger you could buy with it. This is where its starts hurting because when inflation hits, prices goes up and you have to pay more for everything.
Since the beginning of the year 2021, inflation is on the rise. There are many reasons for this price hike but three of those are more prominent than others. Covid-19 has hit hard the most crucial industries like cars, semiconductors and paper. You heard it right. Even paper is hard to import in these testing times.
But don’t worry. There is good news too. Data shows that the prices that have not dropped in months are going to finally see a slow down.
Will Inflation Continue to Hike?
It is hard to tell as nobody can predict what exactly is going to happen but there are still things we can analyze and explore possibilities. For instance, in the case of travel, which is being hit by the current situation, it can recover in a few months and prices will come back to normal. Similarly, the supply chain has been affected really badly but it is also coming to normality but at a slower pace. This can control the price hike in most industries.
This is gonna be a sight to see.
If inflation rises again, there will be two major things worth noticing
First, the stock market will be a show worth watching. As inflation scares away equity investors, it will result a big volatility in the stock market.
Second, the interest rates will go higher as inflation pressurize the Federal Reserve System. it is thought of a great way to fight inflation. So, if inflation kept going up, the interest rates will go up and it will increase the mortgage rates as well.
If inflation did not continue to increase, the rates will stay low for another year or so.
Investment in Rental Property can Save You from Inflation
Irrespective of what’s happening, note that investing in rental property can shield you from the worst inflation. Here is why:
As prices go up due to inflation, real estate prices keep rising along with it. It tends to stay in line with the prices.
Similarly, along with the rise in inflation, the rents also go up. So while a major chunk of your expenses in terms of mortgage stays the same, your income increases. This is considered to be a great way to shield against inflation.
Furthermore, real estate investing being high floor has great benefits all along. A 5-6% ROI is being earned just by paying a mortgage and that should automatically keep its pace with inflation.
So, as inflation becomes a nightmare for everyone else, it is not really that scary for rental property investors. As the inflation rises, the mortgage may rise as well. Therefore, it is better to lock on good rates now instead of waiting for a miracle.
Our second economic indicator unemployment has been very confusing lately. It is because non-farm payroll jobs dropped from over 1 million jobs in July to 235,000 jobs in august. It is a huge drop and one of the reasons may be the delta variant of Covid-19 as people might come out less and go to work less often.
The good news is, according to the labour department’ survey the unemployment rate dropped from 5.4% to 5.2% in August which is the lowest since March last year. On top of that, wages have been growing 0.6% every month which is a 4.3% annual growth. Now it is not enough increase to keep up with the inflation but it could beat the inflation in august at least.
What is amazing is in September there are 10.2 million jobs. So, while unemployment is on the rise. There are enough jobs for everyone to find work and earn a living.
More employment impacts real estate property investors in a good way. More jobs results in a strong economy which in turns produce financially stable tenants which in turns enables investors to offset the impact of inflation.
Sales or retail sales is our third indicator. It indicates the consumer buying behavior. Let’s take a look at the stats.
Since, the delta variant had an impact on the job market, it surprisingly did not hit the retail sales. Consumer spending did not drop in August. On the contrary, a rise was noticed. In Aug, the sales increased by 0.7%.
You may wonder what retail sales have to do with real estate investing. You are right, it is not directly related to investing but it is related indirectly. A rise in retail sales is a good sign. It indicates that the economy is set to grow in the future and a good economy is always good for investors.