Inflation went up slightly month-over-month in October 2022. It means inflation may be slowing down, but how does it affect investors?
By definition, inflation is the increase in living costs as a result of the rising prices of goods and services. The inflation rate is the annual percentage change in price levels. It leads to a decline in your money’s buying power. It simply means that you will no longer be able to buy as much today as you did, say, a year ago or five years ago.
That said, the latest Consumer Price Index (CPI) showed a 7.7% year-over-year jump in October 2022 and a month-over-month increase of 0.4%. The numbers may indicate some cooling down regarding inflation, but it still doesn’t mean prices are going down.
At the time of writing this article, consumer prices are still going up quickly, with household items, such as shelter, food, and energy, as the largest contributors to October 2022 inflation. At least, that’s what the Bureau of Labor Statistics said recently.
October 2022 saw the smallest 12-month increase so far since January 2022. According to Dow Jones, economists were anticipating a 7.9% increase in the inflation rate for October, but we only saw 7.7%.
Seeing the adverse impact of inflation on almost everything everywhere, how is it affecting the 2022 US housing market? What does it mean for people who are heavily into real estate investing? What can they look forward to as we near the end of Q4 2022 and transition into 2023?
How Is the October 2022 Inflation Rate Affecting Real Estate Investors?
Generally, healthy economies experience inflation in smaller degrees each year. The Federal Reserve intends to keep inflation at 2% tops annually. However, in the past couple of years, we went through some events that affected the inflation rate globally.
COVID-19 broke out in 2020 and loomed over us until 2021 as different variants continued to mutate and spread. 2022 saw the Eastern European geopolitical conflict. Both events indirectly but significantly affected how inflation moved in the past two years.
One of the main reasons was the substantial imbalance between supply and demand, with the global supply chain suffering a lot from the two world events.
The main problem, according to Bankrate’s chief financial analyst Greg McBride, is that inflation remains pervasive. Moreover, inflation was one of the main concerns of voters going into the recent US midterm elections. The ordinary folks’ salaries can’t keep up with the pace of inflation, falling by 2.8% in the past year after accounting for inflation.
Housing Is a Big Contributor
According to McBride, despite the recent improvements, the consistent spikes in food items, energy, and housing remain troubling. It, in turn, makes it a huge problem for most households.
“You can’t go without eating, you can’t go without cooking or heating the house and you need a roof over your head. Those are three categories that continue to drive these high levels of inflation.”
Housing makes up for the biggest chunk of consumer spending, accounting for 34% of household spending in 2021. At this point, homebuyers and real estate investors are wondering if now would be a good time to invest in real estate.
First-time investors might be too scared to pull the trigger on investment properties even if they appear to offer excellent profit potential as home prices are still going up, albeit at a slower pace. In addition, investors are also facing high interest rates, making homeownership a lot more difficult to achieve now.
Landlords with long-term rental properties might also be forced to lower their rates to not just accommodate renters who are finding it hard to make ends meet but also to ensure their property remains occupied. At this point, landlords need to keep their vacancy rates as low as possible. In order to do so, they might need to reduce their rates temporarily to attract new tenants.
On the other hand, this season might work for investors looking to sell properties as housing prices are still going up, even if it’s at a slower pace compared to previous months.
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Will Inflation Continue to Cool Down After October 2022?
Now, the question on everybody’s minds now is, “Will the downtrend continue past October 2022?” It is still very hard to say as several factors come into play, such as the lopsided supply and demand, rising oil prices, and global events, among others.
In CNBC’s report, McBride said:
“Any meaningful relief for household budgets is something that is still well over the horizon.”
Shelter, which includes homeownership and rent, played a huge role in the increase in “core” CPI, accounting for nearly 40% of the yearly core inflation.
According to economists, the CPI generally doesn’t provide an accurate and present-day snapshot of housing prices. However, it is important to note that home sales and mortgage volumes have significantly dropped in numbers over the past few months. It has led some to believe that we’re on the brink of a housing market crash.
We Have a Ways to Go
The US central bank has raised borrowing costs aggressively for the past few months in an attempt to mitigate the effects of global inflation. Jerome Powell, chairman of the Federal Reserve, anticipates the Fed’s intervention to continue for the foreseeable future.
According to Powell:
“I would also say it’s premature to discuss pausing [interest-rate increases] and it’s not something that we’re thinking about; that’s really not a conversation to be had now. We have a ways to go.”
Whether inflation will continue to cool down or change course and go up again is something that is yet to be seen. McBride added:
“I think this is something that will likely take much of 2023 to unfold if we’re lucky.”
Wrapping It Up
We see an apparent cooling down in the October 2022 inflation figure. At this point, investors should take all things into consideration before going all-out on a potential investment property.
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