From a small northwestern observatory…

Finance and economics generally focused on real estate

Inflation and Real Estate

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First and foremost, I came of age in the 1970’s, a period that gave rise to the term “stag-flation”. Significant inflationary pressure was real not just in the U.S. but across the globe, and for a variety of reasons. The complexity of the 1970’s is well beyond the scope of a single simple article, but suffice it to say, the past 40-ish years of relatively mild year-over-year price inflation has put the problem out of sight and out of mind for most economists.

That said, the Labor Department reported that April’s consumer price index rose by an annual rate of 4.8%. According to a great article in the Wall Street Journal yesterday by Konrad Putzier, most analysts think this is transitory. I tend to agree. None-the-less, savvy investors should properly be asking the question, “what if?”

Real estate has historically been considered a nearly perfect hedge in times of heightened inflation. Even for the past 40 years, real estate prices/values have out performed the CPI year after year. For example, the median price of a single family home in America in 1970 was $17,000. I’ll let that sink in for a minute. Now, let’s compare the 50-year return on that home to the consumer price index (CPI) as well as the S&P 500 (all three at the end of the respective years).

 House PricesCPIS&P 500
1970$17,00039.8092.15
2020$269,000261.563756.07
Compound Annual Change5.7%3.8%7.7%

Wow. Plus, this doesn’t come close to telling the whole story, If you had invested in that house, you’d either enjoy rents (net, on average, around 5% – 7% per year) or alternatively you would forego having to pay rent to someone else. Further, there have been and continue to be enormous tax advantages to real estate ownership.

Now, here’s the problem, as well described by Mr. Putzier. An inflation hedge, like insurance, is something you want to have BEFORE the wreck happens. Today, we see investors rushing out to bid-up the prices of every piece of property that comes on the market. It’s likely that some of these purchases will be ill-advised and not justified by future rents. Indeed, as I’ve noted on this blog before, wages since 1970 have not kept up with real estate prices, and given the cost of housing today, it would not be surprising if rent increases in the future lag inflation in general.

Nonetheless, existing, well-curated real estate portfolios will undoubtedly be positive compliments to an overall diversified portfolio of investments. Even with the hot-bid market today, we continue to stay active in this market, looking for value opportunities.

If you have any questions about your real estate portfolio, please don’t hesitate to reach out. We look forward to hearing from you.

John A. Kilpatrick, Ph.D., MAI — john@greenfieldadvisors.com


Written by johnkilpatrick

May 26, 2021 at 11:24 am

Posted in Uncategorized

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