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Inflation In Real Estate

April 5, 2022

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Are you curious about what inflation is doing to the value of your home? In this episode of Naturally NWA, I’m going to answer some questions I’ve been getting about the real estate market and how inflation is affecting it. We’ll chat with my friend and mortgage broker Lee Robinson to see how the Northwest Arkansas housing market is faring.

What’s Happening In The Market?

Are you considering selling or purchasing a home and you’re wondering if now is a good time to do that? Have you also been thinking that maybe there’s a crash coming? We’re going to answer all of those questions for you today.

My good buddy Lee Robinson is a mortgage broker here in Northwest Arkansas. He’s been in the business since 2001 and has seen a thing or two when it comes to inflation and the real estate market. We’ll pick his brain about what happens when we see inflation and learn more about what that does to our real estate market.

Of course, Lee is not a broker all over the country, so he’s not going to be able to speak to what’s happening on a national level. However, we’re going to focus on the Northwest Arkansas market and get a sense of what people can expect to see from a historical standpoint.

Property Values And Inflation

Many people wonder if the inflation that we’re starting to see is going to affect property values. According to Lee, the short answer is yes. In fact, it already has affected property values. Inflation starts in asset prices, and homes are considered an asset—just like stocks, bonds, and other investments.

The inflation we’ve been hearing about lately is from the CPI, or the Consumer Price Index. This refers to goods and services, and home units are not counted in that. The low interest rates that the governor has been using to try to stimulate the economy for a long time are what have driven up asset prices. In turn, that’s what’s driven home prices.

Other things have come along that have caused inflation of goods and services, and those are also going to translate to more inflation in housing prices. A lot of that inflation is also created because of the rise in the cost of building materials. Combined with low rates, this drives home prices up.

Is There Going To Be A Correction?

With the current inflation, is there going to be a correction? Lee thinks it’s going to get propped up by inflation; he doesn’t think we’ve seen the end of it this year or next year. We may have several years of high inflation to come.

The Feds tool is to raise interest rates to fight inflation. The worst periods of inflation were in the late 70s and early 80s. In the mid-80s, the Feds’ rate got close to 20%, with mortgage rates up to 16% on a house. It really impacted the market. However, Lee doesn’t think the Federal Reserve is going to raise interest rates fast enough to stop inflation.

While it might slow it down a little bit, they can’t stop it. If they do, they’re also going to stop the housing market and the stock market. Remember, buying a house is a long-term investment. If it goes down, it always comes back up if you’re in the right market. We believe wholeheartedly that we’re in a great market in this area, and there’s still money being pumped into this market for improvement.

A Long-Term Investment

When you buy an investment—whether it’s a stock or bond or home—you want to look at the market you live in. Where do you see it in five or 10 years? If you don’t have a good outlook on your market, then you probably shouldn’t be buying a house in that market. Here in Northwest Arkansas, however, there are still good opportunities. We’ve not seen the high end of the market yet.

If you’re not willing to buy that house and hold on to it for 10 years, it may not be a good thing to try and buy it to just hold on to it for a year. Buying a house should never be a short-term investment. No matter what is going on in the market, you need to look at buying a house as a three to five-year deal at least. Of course, if you do have a downturn in the market, at some point it could be a 10-year deal to get back to where you were.

In 2008, we saw housing prices crash. At that time, we had an overabundance of houses and lots than we had people to buy up. Right now, we have the opposite problem. We have a shortage of lots and houses, especially affordable housing. Prices are going to continue to rise.

Is It A Good Time To Buy?

The last 18 months in our market have really been an anomaly. People have been able to buy a house in late 2019 and 2020 and sell it less than a year later; those people were magically able to make money because of the shortage. Of course, that is not normal. Typically, you have to stay put for three years at least to have some equity in your house.

You should not plan on buying a house and selling it in a year with the thought that you will make money on it. While it could happen, it’s not the norm. That being said, is now a good time to buy real estate? Is real estate a safe investment against inflation?

Historically, real estate’s known as a very good safe hedge against inflation, either from buying a house or as a hedge against your rent. If you’re paying rent right now, rents are going up quickly—and in some parts of the country, very quickly. We’re seeing people paying $1,500 now that are getting notices their rent is going up to like $2,200. That’s a huge increase in rent from one year to the next. While we aren’t seeing that high of an increase in the NWA, rents are going up and they’ll continue to do so.4

If you buy a house and need a fixed-rate mortgage, your principal and interest are fixed. Your taxes and insurance will go up over time, but not near as much as rent. So if you can afford that payment and you’re comfortable being in that house for multiple years, it’s probably a good time to buy if you can get your offer accepted.

Northwest Arkansas’ Growth

The flip side of buying a home is that, in certain price ranges, it’s really difficult. We have competing offers, and it takes a lot of cash to buy a house. A lot of first-time homebuyers and people without as many assets are having a tough time getting offers accepted right now.

I’ve been feeling that for over a year now with the buyers that I’ve worked with, and I don’t know when that’s going to stop. We’re in a growth phase, and many people are relocating here. We were even in the top seven places during the pandemic to relocate to, which was likely mostly referring to Northwest Arkansas. There are even people moving up here from other parts of the state.

While housing prices have room to go up is, Northwest Arkansas is still a lot less expensive than other larger metro areas. We also have quality places to eat and shop and plenty of entertainment and vacation options. 10 years ago, it would be hard to imagine people coming here on vacation; they usually just came to see Walmart Corporate. Now, we have plenty of events along with many museums and parks.

Surviving Recessions

While we’re not recession-proof in Northwest Arkansas, we’ve got a lot of things going for us that give us a little bit more padding. In the downtown Bentonville area, you’re going to run into 30 people that came here from all over the country just to go mountain biking. Our Blues, Bikes, & BBQ festival has become a huge draw in the last couple of years, which really pumps money into that part of our economy.

In the last big recession, it hurt everybody in most parts of the country. We felt it here in Northwest Arkansas, but it wasn’t horrible. Housing prices did go down, but that was because we were way overbuilt. For the most part, we haven’t caught up with demand since we ate up all that shortage of inventory. Nobody has been wanting to build as they did before.

Additionally, more people are living longer than they’re expected to. This means you don’t have people’s houses come up for sale, and there’s less of that happening than people had anticipated. Housing is in shortage in many parts of the country, and Northwest Arkansas’ growth is expected to double over the next 10 years. In order to support that growth, another 175,000 houses have to be built in those 10 years—and that’s not happening currently. We don’t have enough subcontractors to do that amount of work here.

Should You Sell Now?

Housing demand should not go down because of the projected growth that we’re expected to see, and housing prices aren’t going to go down, either. So if you’re waiting for a dip in the market, you’re going to wait a really long time.

It would take a major event—like World War 3 that was prolonged for years—for there to be a serious economic effect on everybody. People could stop moving and buying, and there could be some things that happened in the 1930s such as a stock market crash. We’re not anticipating those to happen, but you also can’t wait around on buying a house or making an investment because of something that may happen once or twice in a lifetime—if at all.

So should you hold out and hold on to your house or should you cash out right now? Are we at the ceiling? If you are comfortable with your house payment and where you live, then stay put. Even if you did want to cash out, what are you going to do? If you rented something, what’s your return going to be? Unless you’re buying another house or you’re going to invest that money somewhere else I don’t know why you’d want to cash out.

Planning Ahead

There may be a few scenarios when it makes sense to sell. For example, if you were planning to move in two years and were concerned about things going on, you might consider selling now. While we’re still going to be pretty solid in the market, a person in a $700,000 or $800,000 house might consider selling. This is because the higher end of the market could get a little slower and be more impacted by economic events and things going on around the world.

However, if you have a house in a more affordable price range, it might not matter what the economy does around the world. It appears that the Northwest Arkansas market will continue to be strong here and keep going up. There are a lot of people out there that say we’re going to hit a recession—whether it’s this year, 2023, or 2024. While that’s probably true, how bad is it going to be? We just don’t know.

If you were planning to move shortly, your job will be transferred, or you want to move somewhere else, you might consider selling now.

Offloading Investment Properties

What if you’re an investor with some rental properties, and you’ve been considering selling; is now a good time to offload investment properties? There are certain times you might sell one of your investment properties. For example, if you don’t know what’s going to happen but are retired and living on that money, you might consider selling one.

This would be a good conversation to have with your CPA, as you want to know what your capital gains responsibilities will be. If you’re of the age where you’re ready to retire and cash out, now is a great time to sell. If you don’t have to sell, it’s probably best to hold on to it if the projected growth actually works out.

Remember, there’s likely going to be a housing shortage around here for several years. If you already have an investment property, you may want to buy more and increase it. So if you’re doing something like that, it’s not a bad time to sell. You might want to consider building a property instead of buying one so you don’t get into a multiple offer situation.

Is A Market Crash Coming?

While Lee doesn’t have a crystal ball, he’s been around the block. From a historical standpoint, he doesn’t feel like we’re going to have a crash. In this market, there is too much demand. If the demand goes away or a major event causes it to slow, it won’t necessarily mean a crash.

Even if things around the country get worse from a macro level—such as a recession—our area could still see growth. You’re going to see more people that want to leave larger cities, which is something we’ve noticed during the pandemic. A lot of people want to get out of the much larger areas.

While this is a fast-growing area and it’s a good area to be, there are a little over 500,000 people in our metro area. Even if another 500,000 moved here in 10 years, we’re still a much smaller market. We have great public schools, a very low crime rate, and many other factors that make living in Northwest Arkansas ideal. These are things people are just finding out about now, which will accelerate the growth even through tough economic times.

A Growing Economy

Northwest Arkansas has a strong economy. Many large companies are pumping money into the economy to make it a better place to live. It almost feels like we’re going to be one of the last areas of the country to feel a recession, and that’s kind of how it was in the past. Other areas of the country declined way faster and way more than they did here in Northwest Arkansas. Even large markets like Florida and California have rebounded now.

Stocks go up, they go down, and housing prices do the same. There are some places that might have really bad, long-term forecasts, and there are parts of the country where you might not want to buy a house. There are some places you can buy a house for dirt cheap and fix it up, but you might never get your money back out of it. That’s definitely not the case in Northwest Arkansas.

Invest In NWA Real Estate

I hope this gave you a good idea of what’s going on in the market here in Northwest Arkansas. If you have any questions for Lee, feel free to email him and he’d be happy to talk to you about the market, interest rates, and the mortgage industry.

If you have any additional questions about the local real estate market, want to get an idea of what your home’s value is, want to know what interest rates look like, or you’re thinking of purchasing a home, feel free to reach out to me and I’ll be happy to help.

For more content and information about Northwest Arkansas, be sure to subscribe to my channel so you never miss an episode of Naturally NWA. Stay tuned to see what I feature next!

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