You’ve seen the headlines and you’ve felt the pinch in your wallet — inflation’s on the rise. Lately, a question I’ve heard often is how increased inflation influences the Annapolis real estate market. Of course, all I can give is my informed opinion as a veteran licensed realtor and member of the Mr. Waterfront team. (I’m sure you have heard the old joke that if you asked an economist about the future of the economy, you’ll get three different opinions!) But based on previous history and classic economics, I believe we can expect two specific impacts on the Annapolis real estate market: housing desirability and prices will both go up.
What Does Inflation Mean?
In economics, inflation is a general increase in prices and fall in the purchasing value of money. Increased inflation causes the price of hard goods to rise. In October of 2021, the Consumer Price Index (CPI) rose 6.2% compared to October 2020, while November rose 6.8% year-to-year. Factors contributing to this rise — a level not seen in 40 years — include a labor shortage and challenges to the supply chain. Groceries cost more, as do construction materials (particularly lumber, which was four times the usual price earlier this year).
What Does Inflation Mean For House Prices?
Pandemic relocation and work-from-home has already caused an increase in house prices. It’s probable that those prices will stay high — or perhaps even increase — since real estate tends to increase in value in an inflationary market.
As the Wall Street Journal recently put it, “Owners of residential and commercial real estate are often better off during times of rapid inflation than owners of stocks or bonds, economists say. Office, retail and apartment rents are typically tied to consumer prices and rise with inflation, pushing up property income. Inflation also makes construction more expensive, which benefits property owners because they can expect less competition from new buildings.”
What forces are at play here? Well, the government often counters inflation by tightening the money supply. The federal reserve’s typical prescription to reduce inflation is to increase interest rates. This slows down the economy and curtails runaway inflation (which you might remember from the 1970s).
Increased interest rates will increase the cost of housing. This means that if you’re interested in buying you should look at locking into a loan sooner rather than later, because interest rates are likely to increase in the coming months.
It’s worth considering, too, how recent federal government bills for both social services and structural improvements will add more money into the economy. While the implications of this government spending are many and varied, more people with more money in their pockets to spend on large-scale purchases such as houses could increase demand, shorten supply, and trigger price increases.
When you combine the inflationary impacts of increased interest rates, more government spending, and increased demand for houses because of the pandemic, I believe you have the perfect recipe for housing desirability and pricing in the Annapolis area to go up.
If you’d like to get into a more specific discussion about housing prices in your area, give us a call anytime. We’re always happy to discuss and answer any questions you might have about buying or selling a waterfront house.