Inflation impacts many areas of American consumerism. The price of gas, groceries, cars and most of all the housing market are all influenced by the current state of inflation.
Often, consumers’ erroneously think of pricing in terms of arbitrary processes, overlooking the myriad of things that determine the cost of specific goods. In terms of property value, many factors play a role in how the property is appraised. Variables that determine the value of a home include comparable sales of similar homes in the vicinity of the home. The basic qualities of the home, such as the square footage, number of bedrooms, and bathrooms, location, etc. The condition and upkeep of the home and whether or not improvements and repairs need to be made.
Supply and demand as well as inflation are the two biggest influences of real estate prices.
Supply and demand is defined as: the number of homes for sale compared to the number of buyers looking for homes. In a robust economy, the number of homes for sale is usually smaller than the number of buyers. Occasionally the demand can exceed the supply in a bad economy as well.
So, what is inflation? In the most basic terms, inflation is an increase in services and/or goods that devalue the dollar, lowering its worth.
Currently, there are two categorical theories on the cause inflation.
Cost-push inflation (type 1) is when the price of goods and/or services increase. This is due to the increase of overhead (costs to own and operate) for the companies that produce goods and services. Because the producers of the goods and services “push” their increase onto the consumer, it is called cost-push.
Demand-pull inflation (type 2) happens when the demand for a specific good or service rises to such a degree that it outpaces the supply. In this scenario, supply becomes constrained, thus prices are elevated and inflation is created.
When discussing real estate, the companies that build homes, sell construction materials, etc. also offset their costs onto the consumer. This can make the price of real estate rise for those looking to buy. However, in our current market, the price of real estate is at an all-time high in affordability.
Due to record low interest rates and an increase in the number of homes for sale, homes are being sold that have a positive cash flow (even with no money down).
Currently, real estate investors are increasing in numbers as the return on investment of housing provides a better return than investing in the stock market. For the average family looking to buy a home, the cost of buying or constructing a new home is also at an all-time low.
Inflationary adjustments and cycles are common. However, market conditions like the ones present are quite rare. In fact, right now, you can buy a home for less than the cost to rent the same home.
For example, a home in Port Lucie Florida is currently renting for $1,100 per month. The same home is being sold for $170,000. That home can have a mortgage payment of less than $1,000 with little or no money down.
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