The consumer price index is up 6%, and the producer price index is up 8%, on track to get to 10% by the end of the year. So if the producers are having their costs increased by 10%, there’s a gap there between the increased cost that they are paying (10%) and the increase we are paying (only 6%). When will that gap be closed and when will consumers have to participate more fully in these greater expenses? They may not have raised the prices of everything all the way yet because they are hoping this inflation is temporary. When do YOU think it will get “back to normal?”
I’ve been listening to a podcast by economist, Peter Schiff. You guys know that I have an undergrad economics degree, as well, so this is something I’m very interested in, and I’m quite concerned about the inflation that has happened and that is expected to continue. A lot of the forecasts are saying we are going into a “generationally” large period of inflation. The typical inflation rate, is maybe 2 to 3%. Right now we’re having 6%+. Forecasting it to go higher, Peter Schiff said it may even go into the 20% range, which would be astronomical. Check the meat section of your grocery store: Tyson Chicken has said they are increasing their prices by 19%. And I heard something about the price of pork going up 30%. According to the chart above, we’re not there yet, but we’re not far back, either…
So you may have noticed this. We’ve seen in the grocery store:
- There’s less meat, it costs more.
- The ice cream containers are smaller.
Things are changing in price quite a bit. And the more rapidly this happens, the more of a shake up it will be for us as consumers.
What Is Inflation?
Inflation is essentially the reduction in value of our money.
- We used to be able to spend $5 and go to the movie theater. Now it costs $10.
- We used to have that $1 meal at McDonald’s and now it’s the Value Menu.
So prices of things keep going up and we can anticipate the prices going up more significantly and more rapidly over the next year than they have in the past.
Who Does Inflation Impact?
Who is going to suffer the most from this? I’m afraid it will be workers.
Eventually labor prices will go up. We’ve talked about labor shortages before: Fewer people are in the workforce, the prices that people have to pay to attract labor are higher. I’m seeing it myself. I’m trying to get a handyman for a client right now and that’s costing roughly $100 per hour across the board. Is it keeping pace with inflation – rising costs and rising rents? – that would be a good question for the labor force to answer. I’ve heard rumors in some places, new hires are getting paid twice as much as existing employees. This indicates that it may take a job change to push your wages to the new inflationary economy… your employer may not just offer that raise up to you on a silver platter.
So, just be aware of that dynamic where costs go up first, and your income goes up last. That has been the trend and the pattern in other historical inflationary period, and I want to talk a little bit about how to position yourself for it and what I anticipate all this inflation meaning for the real estate market.
How Will Inflation Impact The Seattle, WA Real Estate Market?
(a) these prices go up, if they go up significantly, and
(b) if wages are the last thing to rise, then
…working people will be at a disadvantage. Because we will have less money in our paychecks … or essentially the same amount of money in our paycheck, but costs around us will have increased by 20%, giving us less spending power.
So the dollars are worth less, the buying power of our money is less. And eventually I do think wages will rise, but it may not be very quickly.
What happens when our EFFECTIVE WAGES DECREASE?
So this can create some compression of the standard of living. In thre real estate space, this can look like a variety of things: People might choose to live a roommate longer, they might choose a more modest home, they might choose to move back in with friends, family, or relatives after college. Overall, we can expect it to DECREASE demand for housing, especially in the luxury segment of the market.
What Is the Difference Between Inflation and Appreciation In The Real Estate Market?
When it comes to the Seattle, WA real estate market, I do think prices will continue to go up. The question is… is it going up because of Inflation, Appreciation, or Both?
Houses may go up in value due to Inflation… so in that sense, they would keep pace with the inflation… if Inflation were 10%/year, and your house went up in value 15% that year, your house would effectively have appreciated 5% and you would see a real increase in your net worth as a reflection of that growing equity. However, if your house only went up 8% a year, you might “feel” richer, if you weren’t tracking inflation, but in effect your wealth would be decreasing becuase your assets are not keeping pace with inflation.
Even with homes going up in value so much in 2021, if you remove the effect of inflation, you could see that some areas were rapidly appreciating (like the remote suburbs and more historically rural areas), and some were declining in value… the luxury markets in Medina and Mercer Island were especially soft, for example.
If you’ve been waiting for the market to settle down, cool off, and go back to normal, or even crash… stop waiting. I don’t see that happening.
National Real Estate Forecasts for housing prices suggest prices will continue to rise for the next five years. So it may be easier to get a home, but it likely will not be. Many people may find themselves priced out of the housing market over the next few years… especially when it comes to getting their first choice in properties. The position that I don’t want my buyers to be in is the position of is waiting for the market to get better and then seeing prices go up and up until they can’t get anything any more. Even last year when we were seeing prices go up, you could get a single family home for $500,000 in Shoreline, for example. Whereas working now, it’s very hard to get one for less than $600,000. I had a client buy a home exactly 12 months ago in Shoreline, WA for $585,000 that is now worth $735,000.
Real Estate Prices May Keep Going Up, But How About Your Lending Limit?
Your amount that you’re approved for on your loan with your mortgage broker is derived from a calculation including your debt and income ratio, your credit, and your wages. Those things are not going to change as quickly as the home prices, which are bumping up 10%, 20% per year. (Don’t believe me? Check out Kirkland and Bothell! )
So as this trend continues, your buying power is going to be decreased, I don’t want you to wait and wait only to find yourself able to afford lesser and lesser homes. The strategy here would be to get into a property sooner rather than later. Even if it means you have to go through the hassles and stress of buying in multiple offer situations, making an offer on a couple homes, and finally just settling for the one you can afford now. Getting your foot in the door and buying your first property, even if it’s not your dream home, is a goal that’s worth having because the market is rapidly running away from us at this point.
How To Protect & Build Your Wealth During Inflationary Times
Now, whether or not you’re looking at buying a home at this point, you should still be asking what you can do to protect yourself when it comes to your money and your financial position.
The worst place to be right now is owning debt, we call it “holding paper.” You don’t want to be the bank. You don’t want to have big loans out. And you don’t want to be a retiree with all your money in bonds. These are all situations in which you would be entitled to a fixed stream of income payments. Let’s say you have a pension where you get $500 a month, for example. It’s a bummer that the income stream is “fixed” because the basket of goods that $500 can purchase is going to be getting significantly smaller over the next several years.
The next worst place to be is sitting on a mattress full of cash, for similar reasons. Worry, for example, about that cash you have stuffed under your pillow, stashed in your savings account, and set aside for the down payment of your home. The buying power of that cash is going to be reduced.
So the place that we always tell people to go with their money during an inflationary economy is into hard assets, durable goods, things that will keep their value. Note that can of Campbell’s soup might have cost $1 at the beginning of the year, will cost $1.20 at the end of the year. Who knows? Maybe it’ll cost $1.40 by 2024.
So… it may be that holding hard goods is a better store of value than holding cash right now. Whether that means you want to stock up at the grocery store and buy lots of toilet paper or cans of soup, I don’t know. It’s probably not a bad play, if I’m honest. However, what it means for me is having bigger assets where I store my wealth… for me that looks like real estate. And I realize that as a real estate broker that sounds very self-serving, but even stock market advisors are telling people to go into real estate. It’s legit and I’ll present my case.
Is Leveraged Real Estate The Best Inflation Hedge?
I have seen in some of the markets where I buy rental property, (These are outside of the Seattle area… I buy in a couple of other cities where we have a combination of good appreciation rates and cashflow…) there are corporate buyers from out of state, big companies buying up property there. Lots of property. That’s where the big dogs are keeping their wealth… and that’s an unusual thing.
I’ve been a real estate investor for 20 years. When the banks all got the properties back in 2008, these big corporate institutions did not want to be holding these assets. So now they are going into holding these real estate assets. And so that might be something for you to look at, as well, if this is something that you’re interested in.
I subscribe to a service that gives me data to use when deploying some of these strategies. I can track appreciation rates and cash flow potential for homes across the country. I would be happy to share with you on an individual basis, and discuss which markets are doing well, what the price of entry is, and more. Many other cities are less expensive to buy property in than Seattle. And you can look at investing there if you’d like, just like I do.
Is Dave Ramsey WRONG?
The third point that I wanted to make is that in an inflationary economy, I have to differ with some of Dave Ramsey’s pearls of wisdom on getting out of debt (I like most of what he says), and note that it’s an excellent time to be leveraged. Leveraged means having a lot of debt. So, even if you could put 20% down on a property, if you could go in with 10% down or 5% down, you would be more highly leveraged. And right now, that might be a smarter thing to do. You’d have to run the numbers. You may see that, although debt carries some risk, the potential rewards for taking this approach may pay off big-time in an inflationary economy.
Imagine how they loan you at the beginning of the 30 years… and it’s enough money to buy a house. You monthly payments are big at first, but by end of the 30 years, your payment seems like it’s only enough money to buy a pack of gum or something off the value menu at McDonald’s. So when that cash that you’re paying your mortgage with becomes a wheelbarrow full of cash that you’re taking to the store to buy a loaf of bread. Then your monthly mortgage payment has essentially become a loaf of bread worth of monthly payment, instead of something really large and significant.
To be clear: I’m not predicting that level of runaway hyper-inflation like Germany saw after WWI. But I do think inflation will become a significant factor in our lives and our lifestyles in a way that it has not been for the past 40-plus years that I’ve been around. So, I want to put this on your radar, I think it will be significant.
- If you’re looking to buy, let’s go ahead and buy that house.
- If you’ve sold and you’re looking to move up, excellent time to do that, let’s do it sooner rather than later, so that we don’t have the cash sitting in the bank for a long time.
- If you like the idea of having free and clear property, I hear you, but it might be a good time to leverage. Especially if you can refinance, get a home equity line of credit, pull out some of that cash and place it into hard assets, durable goods, like real estate with leverage. I think that’s going to be a much better position for you moving forward.
So, I’m not trying to be Chicken Little saying the sky is falling here. But this is something for you to look into. This is something that I am very much looking into and telling my family members about.
We are buying more real estate and we are doing it with leverage. So if that’s something that you’d like to discuss, I’m happy to help you with it. If you’re looking to buy a home, excellent time to do it, let’s get you in there. Prices are not coming back down, in my opinion, with the data we have at this point.
This is a big topic and I’m happy to discuss it in more depth. I am here to help and advise you. Fill out the form below and let’s start the conversation.