Convince More Clients to Buy in an Inflationary Economy
The Federal Reserve is working to bring inflation down by raising interest rates to slow the economy. It’s unclear how long this will take, which means the future trajectory of mortgage rates are also unclear. Greg McBride, Chief Financial Analyst at Bankrate said “Inflation will have a strong influence on where mortgage rates go in the months ahead. . . . Whenever inflation finally starts to ease, so will mortgage rates — but even then, home prices are still subject to demand and very tight supply.”
The question all real estate agents are asking now: Will people wait out this period of elevated prices?
Considering homeownership is one of the best decisions you can make in an inflationary economy, it’s up to real estate agents to educate clients on the many reasons they shouldn’t wait. Mark Cussen, Financial Writer at Investopedia, says:
“Real estate is one of the time-honored inflation hedges. It’s a tangible asset, and those tend to hold their value when inflation reigns, unlike paper assets. More specifically, as prices rise, so do property values.”
Even with rates rising, real estate investments perform well. Specifically, income-generating property and multifamily units have historically shown a greater ability to grow net income during expansionary periods than other assets. Because of this real estate has always been considered a strong inflation hedge. In 1979, when the consumer price index (CPI) in the United States reached its highest level at 13.5%, the average dividend income from Real Estate Investment Trusts (REITs) trading on the stock exchange that year was 21.2%. The yearly consumer price inflation accounted for 5.1% in the first eight months of 2011. With annualized total returns in this period averaging 8.4%. The REIT returns once again preserving buying power. These numbers and many more were collected by researchers from The Wharton School of the University of Pennsylvania.
Owning real estate has a number of benefits during periods of high inflation. Property values appreciate, keeping up with inflation. And with the rising cost of labor, material, etc there are fewer real estate development projects. Share with your client that inflation pushes all prices up, rents included. Demand for existing properties will rise and in return occupancy rates will skyrocket. Raising the rent generates higher revenues which continues to increase the value of the property.
Maybe most importantly, mortgage payments on fixed-rate financial instruments do not change with time, this means the payments are staying the same while equity growth accelerates. So make sure you clients are understanding that inflation reduces the value of money owed in the future.
That said, be prepared and aware that as the mortgage does rise not everyone will be able to make risky and expensive investments. Demand for real estate may decline as debt becomes more expensive. But with these facts in hand, sit down with each client and take your time explaining the financial situation in the U.S. and what this could mean for them long-term. Clients with low debt, and a large income who trust you will take that leap of faith and invest in more properties that will help continue building their wealth.