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By Jeffery Bower

The effects of the COVID-19 pandemic on the economy and the financial markets have been  immense. The stock market has been booming throughout, and prices of houses have risen  tremendously, causing inflation concerns. However, with the stock market and real estate markets  doing so well, how much of it is because of policy stimulus? How much of it is real?. According to the  Wall Street Journal, “the U.S. economy’s rebound from the pandemic is driving the biggest surge  in inflation in nearly 13 years, with consumer prices rising in May by 5% from a year ago.” 

Inflation

With stimulus policy being passed throughout the pandemic, inflation concerns are evident,  increasing prices from restaurants to houses. According to a survey conducted by the Financial  Times, Economists expect the Fed to keep inflation under control. Alan Blinder of Princeton  University states, “As inflation goes up and the economy improves, the traditional hawk-dove  differences across the Federal Open Market Committee are going to start to reappear.” We are  currently in a pro-inflation environment that promotes growth. Economists like Alan Blinder of  Princeton University do not expect inflationary concerns to last and forecast an interest rate increase as early as 2022. 

The Real Estate Market 

In May, the rise of housing prices accounted for over a quarter of the overall inflation increase.  According to the consumer price index, housing prices have risen 2.2%, but other reports show  an increase of more than 13%. Home prices rise because of the rise in the cost of labor and  lumber to build the house and how people value it as a capital investment. According to  MarketWatch, with the COVID-19 pandemic, many wealthier Americans who now can work  from home decided to move out of major cities with high costs of living to the suburbs, saving  money doing so. This caused the rental rates to decline in pricier areas, but the rents actually  increased in more affordable areas, like the suburbs. To solve the increased prices of housing,  more houses need to be built to meet the demand. Not only that, the mortgage forbearance and  the Fed buying mortgage-backed securities and lowering interest rates all have an impact.  Commercial Real Estate, such as multi-family and industrial, is starting to go back to pre pandemic level, as borrowers seek and obtain aggressive loans. 

Real Estate as an Inflation Hedge 

Real Estate has been viewed as a partial inflation hedge for a long time. REITs and property  assets increased prices can be passed through rents. For apartments and hotels, reaction to  inflation can happen quickly because of the shorter lease terms. Economists warn that the  housing market can dip. As the cost of everything goes up, you can lock in a low-interest, fixed rate mortgage, then the price of your home will stay the same as the value of your property rises.  

Finally, 

If you buy a house that appreciates in value by 20%, you are getting a worse deal than if you  purchased it before it increased in value. The cost of homes rising because of the demand will  not change with the historically low-interest rates. What can be done about the rise in the price of  houses is from federal policy; when the Fed increases interest rates, and more homes can be built  to meet demand, the cost of houses can go back down.

References 

Guilford, G. (2021). U.S. Inflation Is Highest in 13 Years as Prices Surge 5%. The Wall Street  Journal. https://www.wsj.com/articles/us-inflation-consumer-price-index-may-2021- 11623288303.  

Passy, J. (2021). An inflation storm is coming for the U.S. housing market. MarketWatch.  https://www.marketwatch.com/story/an-inflation-storm-is-coming-for-the-u-s-housing market-11623419869.  

Smith, G. (2021, June 30). FirstFT: Economists predict multiple US interest rate rises by end of  2023. Financial Times. https://www.ft.com/content/33ddfd40-34d4-49d4-b852- 6a416f15560d. 

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