I suspect that inflation will continue to rise for an extended period of time, well past the time where Covid stops impacting supply chains.
A large reason for this is the real estate component to the calculation for inflation. From an article in Aug 2021:
Rent and owners’ equivalent rent cover housing costs and are about a third of CPI. Inflation in rent is stickier and more persistent than other price pressures.
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Private sector reports show double-digit increases in rents across the U.S. this year…
“Rental increases, which is the biggest chunk is only going to accelerate here. I don’t see rent increases as transitory.”
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The pressure on rental prices has to do with a long-running shortage of housing stock, which has roots going back to the financial crisis,
https://www.cnbc.com/2021/08/11/inflation-rent-could-be-a-pe…
When new-build inventory does come on it market, it will still be at current day’s elevated prices, unless it is a non-profit building building them. Post Covid slaughter at the retirement homes, I am seeing an increasing desire of the elderly to age in place. While the vaccines may temper the desire to age in place for some, IMO others will wonder about the next virus and desire to have more control over their environment. Perhaps an increase of the popularity of multi-generational housing will happen, as parents help their child buy a property with an in-law suite where they can both live. We anticipate a growing appetite for solutions that enable older adults to age in place. The US home care market is expected to grow from $100B in 2016 to $225B by 2024. The trend is driven by Baby Boomers, who overwhelmingly prefer to age in place. This has had the effect of further reducing resale inventory coming on market as the elderly decide not to sell.
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these new types of supplemental benefits allow Medicare Advantage plans to cover services essential to aging in place
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As COVID-19 has surfaced new fears associated with long-term care facilities, the desire for aging in place has accelerated.
https://rockhealth.com/aging-in-place/
SFH inventory has been snapped up by large corporations to place on the rental market: The median price of an American house has increased by 28 percent over the last two years, as pandemic-driven demand and long-term demographic changes send buyers into crazed bidding wars.
Might the fact that corporate investors snapped up 15 percent of U.S. homes for sale in the first quarter of this year have something to do with it?
https://slate.com/business/2021/06/blackrock-invitation-hous…
All this contributes to a declining inventory of available homes for sale that has nothing to do with Covid supply chain issues. Add on to that the increasing number of Millenials looking to buy: But most housing analysts don’t expect a wave of sustained home price cuts for quite a while. They say the pandemic and the emergence of remote work accelerated millennial home-buying trends already under way.
It is often theorized on this board that rising mortgage rates will bring housing costs down, but this will not happen until there is a balance between supply and demand. The insane rate of increase for housing will slow down, but it will continue to rise. 30 year fixed rate mortgages are still sub 4%, which is historically cheap. Rising mortgage rates will add fuel to the feeding frenzy as people bid on limited inventory in an attempt to buy before rates increase further.
I can provide similar links to articles describing why rents are skyrocketing and unlikely to come down anytime soon. Supply of rentals are constrained, with an increasing number of people unable to afford homes that continue to rise in price increasing rental demand. Large corporations have continued to buy SFH at a fast clip and can to some extent control the market. Continued inflation of property value causes significant increases of property taxes in areas where it is not regulated. Ours just went up 20%, and that will be passed on to our tenants at renewal.
So that’s my theory. Please criticize or enforce it with further insight.
How do we invest with this in mind? Real estate itself is great for those who don’t mind the work involved or have the personality where control can be ceded to a manager, but realizing capital gains on a property results in taxation of the whole transaction, unlike selling off shares in a fund which allows for better control. Investing in the US Homecare Market sounds interesting as well, and of course the very limited Ibonds that we can access.
Ideas?
IP