The Ins and Out of Appreciation and Inflation

Inflation severely damages the purchasing power of the dollar. A weaker dollar, in turn, buys fewer goods and services. However, real estate is an exceptional hedge against inflation as annual home prices usually rise at or above the published inflation rates.

Inflation boosts home appreciation rates while also making mortgage debt more affordable over time. How is this possible? The Rule of 72 investment formula has been used for many decades to forecast how long it may take an investment or asset like a home to double in value.

For example, a $400,000 home that has consistently increased in price by 10% per year like in regions near Seattle may take 7.2 years for that same home to double in value by dividing 72 by 10. After 7.2 years, the $400,000 home may be worth $800,000 if the appreciation continues at 10% per year.

At the same time, the Rule of 72 makes the mortgage debt payback more affordable over time as the purchasing power weakens. Effectively, a $350,000 loan that was funded 7.2 years ago now is halved or cut in half because it’s equivalent to paying off the mortgage debt with $175,000 (or 50% of $350,000).


Supply and Demand for Homes

For real estate, one of the best ways to determine the current supply of housing available for sale is to review the Days on Market (DOM) numbers for the region which interests you. The Days on Market data is based upon the total number of days that a home was listed for sale with one real estate licensee up until the signing of the sales contract. The Days on Market number reached at or near an all-time record low in February 2022 when it was measured at just 18 days, as per the National Association of Realtors.

For example, a buyer who is interested in purchasing a home in Issaquah might consider taking a closer look at the Days on Market home listing trends over the past several months or years. If the buyer sees several properties that are listed near 90 days or so, this may be a sign that the local housing market has reached an equilibrium point where the number of buyers and sellers are balanced out.

Sometimes, there are plenty of buyers out there for properties with longer Days on Market numbers. Yet, the homeowner may have listed the price above market value even as the listing agent tried to dissuade the seller from pricing the home too high. As the DOM numbers increase, the seller and listing agent might consider lowering the price to attract more buyer interest.

The supply of available listings and Days on Market trends in King County has consistently been below national trends. Lower Days on Market numbers in our local regions generally lead to higher home appreciation rates which are above national averages.

Sources: Days on Market (US) and Days on Market (King County, WA)


How Accurate is Inflation?

It’s been said that the official government-published inflation data is well below the actual inflation numbers. Why would the government share inflation data that was lower than the actual numbers? First, the government entitlement programs like Social Security and Medicare are tied to published inflation rates. If the government published 10%, 12%, or 15%+ inflation numbers, the amount of government entitlements they would need to pay out to retirement age Americans would be much higher.

Since 1980, the federal government has literally changed the definition of how inflation is measured more than 24 times. Each time that the inflation measurements have been modified, it was designed to make inflation appear much lower than how it actually is at present.

If inflation was measured today here in 2023 like how it used to be measured back in 1980, the true rate of inflation might be closer to 15%. In 2022, the published inflation numbers by month were much lower than 15% as shared below:

Source: Statistica

Vegetable prices increased by 80.6% year-over-year by November 2022. Shockingly, vegetable prices jumped by a staggering 38% in just one month between October 2022 to November 2022, as per the U.S. Bureau of Labor Statistics. True inflation rates that may be closer to 10% to 15% than 6.5% to 9% means that home values should continue to appreciate at a very rapid pace.


Mortgage Rate Trends

Obviously, we’ve seen mortgage rates rise from historic lows in 2021 and 2022. Some people may view these rising rates as warning signs for increasing home inventory listing numbers and fewer buyers who can qualify. However, there are several reasons why the Days on Market listing numbers may continue to remain below historical averages. Let’s look at a few potential factors that may keep listing inventory low:

      • New home construction is well below historical averages over the past several decades. With fewer new homes to purchase, the demand for older homes should remain steady. Home construction costs also jumped by more than 30% between in 2022 alone.
      • As of July 2022, upwards of 80% of all residential mortgages had rates at or below 4% as per CoreLogic. Some sellers may not want to lose their mortgage rates at 3% or 4%, so they will decide to hold on to their home and wait until mortgage rates fall again because they may need another mortgage. If so, home values should remain solid as the number of home listings don’t rapidly increase.
      • Real estate continues to outperform most other asset classes like cryptocurrencies, stocks, and bonds. As a result, the demand for real estate from US-based homeowners and foreign investors could be very consistent.

While rising inflation rates are making our groceries and utilities more expensive than in years past, these same high inflation rates are creating more wealth for property owners who use real estate as their hedge against inflation. To learn more details about your current home value and Days on Market estimates for your region, please contact our office.