With the Federal Reserve printing money at an alarming rate and prices of many commodities rising, inflationary concerns are on the horizon and the US dollar is volitive. There has been a continual drop in the value of the dollar during the past ten months. So, the purchasing power of cash is already suffering on a local and an international basis and domestic inflation will only make things worse.
Interest rates are extraordinarily low and will likely remain there for some time as the Fed tries to push the economy forward. But during times of inflation interest rates historically have not remained low for any length of time so this creates a paradox.
Another factor that figures into this complex equation is the vast amount of cash being held by baby boomers and retirees. Most of these people are in no position to go back into the workplace and earn more money. Traditionally they could put their cash into fixed income investments that provided a reasonable rate of return and would sustain a modest standard of living. But that has become extremely difficult as yields for virtually all types of fixed income instruments have tumbled to very low levels. Asking retirees to take on stock market risk or investing in Crypto when the Fed is printing money and creating an asset bubble in equities is simply not practical.
When inflation rears its ugly head, real estate affords many positive attributes for homeowners and investors. As a homeowner with a mortgage, inflation helps you pay back the loan with cheaper dollars. Also, real estate tends to appreciate at or above the rate of inflation. While there are no guarantees, it is generally preferable to hold real estate rather than cash during inflationary times.
Owners of single-family residential properties and small to medium-size multi-unit buildings generally tend to perform fairly well during periods of inflation. The one big potentially negative factor affecting this arena is the lingering affects of the pandemic how it will impact residential evictions and vacancy rates. If vacancy rates rise significantly as remote workers head back to the city, then it will be especially tough for landlords the Tahoe Basin to increase rents enough to keep up with inflation.
Previously, we talked about the undulations of local commercial real estate with people moving into our community and starting businesses just to close their doors to the COVID-19 and Delta Variant regulations. If commercial vacancies jump again and the labor market is undergoing a seismic shift, rents will not be able to keep pace with inflation. In that case, the value of commercial real estate would suffer, and it would not be considered a good hedge.
For investors, inflation can have positive benefits if you are able to raise rents faster than your expenses increase. Rising rents plus inflation also mean rising property values in relative terms. But, not all property values increase equally during inflationary times. Higher quality properties in desirable locations tend to do better than less desirable ones.
Real estate can be a good hedge against inflation, but you have to pick your spots. Lake Tahoe appears to one of the best ones for the long-term property owner.
Don Kanare is the founder and Sabrina Belleci is the Owner / Broker of RE/MAX North Lake.
