Inflation Uptick, What You Need to Know and Should Expect
Comments Off on Inflation Uptick, What You Need to Know and Should ExpectThe recent pandemic has caused significant construction supply chain challenges. Material costs have increased drastically; lumber futures are up 280%, steel mill product costs are up 55.6%, and gypsum product costs (plaster, drywall) have increased 12.5%. On top of the cost increase, lead times for construction materials have doubled or tripled, in many cases.
One example to offer…a BDR client recently called a contractor for a 6,000 square foot build-to-suit retail structure. Upon giving the bid, the contractor stated, “We will hold this pricing for two days.” This is in stark contrast to the typical pricing hold of 30 days. The urgency on both sides is a result of supply chain challenges.
Tensions like these extend beyond material cost increases. The Federal government recently injected an estimated $6 trillion dollars into our economy. Many businesses, communities, and families depended on this money to sustain their livelihood during the government shutdown. While the government took this step to rescue our economy in the short-term, the long-term impact should not be overlooked.
Inflation is a reality we will face in the years to come. Dating back to 1914, the yearly inflation rate in the United States has averaged 3.23%. The highest single month of inflation was in June 1920 when it skyrocketed to 23.70%. Since 2009, inflation has averaged 1.5-2% per year. According to tradingeconomics.com, April 2021’s inflation (most recent data point) is 4.2%. Each month in 2021 has seen an upward inflation trend.
There are several reasons inflation can uptick. Some of the causes include:
- Injecting money into an economy. During the COVID-19 pandemic, the United States government injected around $6 trillion in the economy, which has ballooned our national debt to an astonishing $25 trillion. Since February 2020, the monetary supply in the United States has increased 26%. This is the largest one-year jump since 1946. According to USA Today Money, “Creating too much money that chases too few goods leads to price inflation, decreasing the purchase power of the dollar.” To note, there is more US currency in circulation today than ever before.
- Demand-pull effect in an economy. Staying at home has led many folks to save up money (fuel cost, eating out for lunch) while consistently living hours in a single space (home). The reality many have lived for the past 12+ months provides an abundance of opportunity to find things to upgrade within a home. This COVID-sparked phenomenon has led to a surge in demand for goods and services. Look at the current residential housing market. Virtually any residential real estate agent will emphatically tell you it is currently a seller’s market. This extends well beyond our home base in Morgantown, WV, to the entire country.
- Cost-push effect in an economy. In addition to increased demand, suppliers have been unable to maintain pace due to labor and raw material shortages. For an extended period of time, factories were shut down or stalled due to the pandemic. The effect is large gaps in the supply chain across many sectors – from chicken wings to construction materials. Increased and/or consistent demand with a decrease in supply results in higher prices.
These signs and more point to high rates of inflation. The volume of currency (USD) circulating in our system, pent-up demand for product and current supply chain issues are key indicators of increased inflation, which means tomorrow’s dollar will be worth less than today’s dollar.
One way to invest smartly given this circumstance is an inflation hedge. An inflation hedge typically involves investing in an asset expected to maintain or increase its value over a specified period of time. The investment goal is to secure assets close to, at, or greater than the rate of inflation. Investors should weigh their options across all investment opportunities.
Real estate is considered a strong hedge against inflation because property values and rents typically increase during times of inflation. Real estate has intrinsic value, is in limited supply, and is a yielding asset. People need to have shelter regardless of the value of their currency. Real estate investing also allows investors to utilize other people’s money, include the banks’, to make money.
Interest rates are still hovering around all-time lows which makes real estate a particularly attractive option in the current investment environment. When the rate of inflation goes up, fixed-interest rate financing costs less than when the loan was taken out since the dollar has lost some of its value. The borrower is essentially paying the lender back money that’s worth less than when the borrower took out the loan. This allows investors/borrowers to pay back loans using cheaper dollars.
“A dollar today is worth more than a dollar tomorrow.”
At Black Diamond Realty, we have seen an uptick in demand for multifamily assets and other investment properties, income producing assets, across all sectors. We anticipate this trend to continue due to many of the reasons highlighted in this article. West Virginia has received tremendous positive economic momentum. From the Hyperloop announcement to the Smith’s Ascend WV program, momentum is building in WV. North Central WV remains an economic shining star in the state.
Call Black Diamond Realty today to explore your investment options. We have a team of professionals who understand complicated dynamics driving the various markets we serve. Let us underwrite your next investment project. Hedge against inflation wisely.
Article by: Article by: David Lorenze, Caleb Wooldridge Edited by: Dr. Stephanie Lorenze
