There’s a lot of confusion in the economy right now: inflation, unemployment, supply chain issues, and more. As you know, what happens in the broader U.S. economy has important implications for real estate investors.
Let’s review the three most critical economic indicators—inflation, unemployment, and retail sales—and where they sit today, and how they impact investors like you.
Inflation is top of mind for every type of investor out there. If you haven’t heard, inflation is a pretty big deal right now because it’s higher than it’s been in about a decade. This basically means that the cost of goods and services is increasing, which consumers hate because it essentially means you’re losing money.
As an example, let’s say you have $10, and that $10 can buy you your favorite sandwich—maybe a meatball sub, a turkey club, or a Cubano. But then inflation hits and the sandwich you love now costs $15, which weighs heavily on your wallet. Now your $10 is only worth two-thirds of a sandwich when it used to be worth a whole sandwich. This is why everyone hates inflation.
Since January 2021, inflation has been rising. There are a few reasons for this increase, but the major reasons are three stimulus packages in the last 18 months that have dramatically increased the monetary supply in the U.S. economy, which can have inflationary effects, and supply chain issues from COVID-19 that are suppressing supply in key industries like semiconductors, cars, and paper. Yes, even paper is hard to come by right now.
But don’t fret. Some seemingly good news has been emerging. Recent data points suggest that the rapid rise in inflation we’ve been seeing could be slowing down.
The core inflation number—which excludes volatile prices like food and energy—was up only 0.1% month over month in August. The broader inflation number that includes food and energy was up just 0.3%.
And although it’s still up, which no one wants to see, it’s the lowest month-over-month inflation number since January.
To put this in perspective, in June it was 0.9% month-over-month growth—three times greater than August’s number. The biggest decreases came from travel and used cars.
Will inflation continue to rise?
It’s really tough to say what is going to happen from here. For things like travel, which I think is being suppressed by a resurgence of COVID cases, I can imagine prices recovering over the next several months. Supply chain issues seem to be resolving themselves, albeit slowly. That could offset rising prices in some industries.
This is going to be something to watch. If inflation spikes again, you can expect to see two major things.
First, we’ll see big volatility in the stock market because inflation threatens returns and spooks equities investors.
Second, the Federal Reserve System will face pressure to raise interest rates. Raising interest rates is generally considered a great way to fight inflation, so if inflation keeps rising, the Fed could raise their rates—which in turn will send mortgage rates higher.
If inflation continues to taper off, you can probably expect the Fed to keep rates low for another year or so.
Rental property investments protect against inflation
Regardless of what happens, remember that rental property investing is one of the ways—if not the single best way—to protect yourself against inflation. There are a few reasons for this.
First, the cost of homes tends to keep pace with inflation. When prices across the economy go up, home prices usually keep in line with, if not exceed, inflation.
Second, the cost of rent tends to keep pace with inflation. So while your biggest expense—your mortgage—stays flat, your income can grow. This is probably the greatest way to hedge inflation.
Third, real estate investing has a really high floor. Just by paying down your mortgage, you can earn a 5% to 6% ROI, which should keep pace with inflation all by itself.
So just remember that while inflation sucks for everyone, it sucks less for rental property investors. And if inflation stays high, mortgage rates will rise—so locking in good rates now could be a great idea.
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Let’s move on to our second economic indicator: unemployment.
Unemployment continues to be a very strange and confusing phenomenon. The big news is that hiring slowed down dramatically in August, with non-farm payroll rising by only 235,000 jobs. That may sound like a lot of jobs—and it is—but it’s down from July, which was initially announced at 943,000 jobs, and has since been revised to over 1 million.
This is a huge drop. The primary thinking is that this is because of the delta variant. With cases rising, people are going out less. Maybe job seekers are less eager to go into work, and some sectors like travel and food and beverage are probably not hiring as quickly.
There is some good news. The labor department’s household employment survey showed that the unemployment rate still dropped in August from 5.4% to 5.2%, which is the lowest the unemployment rate has been since March 2020.
In further good news, wage growth was up 0.6% month over month, which brings the annualized wage growth up to 4.3%. It’s not enough to keep pace with current inflation numbers, but in August at least, wages grew faster than inflation. Let’s hope that trend continues because it would be a huge boost to the entire economy, as well as for rental property investors who need to raise rents to offset inflation costs.
What’s crazy to me is that as of the end of August, there were still 10.1 million job openings in the U.S. So while unemployment is higher than anyone wants it to be, there are certainly enough jobs out there that people who want employment should be able to find work.
In September, the federal government’s additional unemployment insurance benefits expired. It’s long been speculated that the expiration of these benefits would be the catalyst for many people who have been out of work for a long time to get back into the labor force. There have been numerous studies showing that many people were making more income from unemployment than from their previous job, so hiring has been an ordeal.
For real estate investors, the more employment, the better. It’s the foundation of a strong economy, which in turn supports financially stable tenants and wage growth—which should help investors offset the impacts of inflation.
I believe it’s just a matter of time before things improve. With all those open job positions, I think unemployment will go back down to 3% to 4% in the next six months.
Finally, let’s look at retail sales, a good indicator for consumer sentiment and spending.
In August, retail spending rose 0.7%, which is a fairly significant increase. This shows that while the delta variant does appear to have negatively impacted job numbers in August, it doesn’t seem to be impacting consumer spending. There were big gains in groceries, big box stores, furniture sales, and a few other sectors.
While this metric isn’t directly related to real estate investing, retail spending makes up an enormous portion of the economy. Seeing it rise so significantly in August is a good sign that the U.S. economy as a whole is poised for growth for the foreseeable future. And that’s always a good thing for investors.