The Federal Reserve’s recent actions against inflation might have caused it to go lower, but US housing prices 2022 are still on the rise.
We saw the Fed increase interest rates by 0.75 bps in its July meeting to combat the upward movement of inflation. Whether the Fed was successful in its fight against inflation or not is still up for discussion. However, we’re seeing a fall in last month’s inflation rate since it reached its highest point in 40 years in June 2022.
The lower inflation can be attributed to the decrease in the gasoline index. Thanks to the more favorable gasoline index, the Consumer Price Index (CPI) remained unchanged from the month before. The CPI for almost all items was 8.5% in July, a slight drop from June’s 9.1% yearly increase.
However, despite the downward trend, housing prices 2022 continue to soar. Michael Bowman, a Board of Governors of the Federal Reserve System member, says, “I see a significant risk of high inflation into next year for necessities including food, housing, fuel, and vehicles.“
Bowman adds that amid the slowdown in house sales, rent will continue to climb dramatically because of the continuous increase in housing prices 2022. He also says that gasoline prices are still 80% higher compared to the pre-pandemic period, despite their moderate movement in recent weeks.
According to the CPI, Americans spent less on gasoline in July, bringing down the indexes for used cars and trucks, airline fares, communication, and apparel. However, the slowdowns were offset by index increases for both food and shelter. Experts, however, are hopeful that mortgage pricing will improve for the 2022 US housing market.
Related: When Will Mortgage Rates Go Down in 2022?
Inflation Rate and Housing Prices
If you’ve been with us for the past few months, you’ll know that mortgage rates have been on a roller coaster ride. While we enjoyed record-low mortgage rates for most of 2021, we saw them go beyond the predicted 5% mark earlier this year. Experts and analysts earlier predicted how we would see 2022 end with mortgage rates hitting 5%. However, we did not expect them to manifest as early as Q2 2022.
Just last week, we reported how mortgage rates dropped below 5% for the first time since April 2022. However, just a week after the fall, it went back up again by at least 0.12%. At this point, we can attribute the movement in mortgage rates to inflation, which, consequently, affects housing prices 2022.
The pandemic can be blamed for the higher-than-usual volatility not just in housing prices but in the overall economic data. Inflation plays a big part in housing prices but isn’t the sole driver of the changes in pricing. Several other factors are taken into account, such as housing demand, inventory, location, and mortgage rates.
The Relationship Between Inflation and Housing Prices
Real estate is often viewed as a good hedge against inflation. Generally, housing prices tend to go up with inflation. For one, a home’s value goes up with inflation rates, and two, it is a leveraged asset. However, since the economy is dynamic, nothing ever stays the same.
For instance, if you’ve secured a good mortgage rate that doesn’t change, your property’s value might increase but the price you must pay might not. Typically, when you take out a loan, you make a down payment of anywhere between 20% and 30%.
A property’s price goes up by the inflation rate times the house’s cost. It is not by how much down payment you make. So let’s say inflation doubled the value of an investment property, it could have tripled or quadrupled the value of the down payment.
The above scenario works especially well if you take out a fixed-rate mortgage because you would be making lower payments in terms of dollar value after adjusting for inflation. You will essentially be paying less for a loan than when you took it out.
Related: Home Sales Slow Down Amidst 0.75% Fed Rate Hike
What It Means for Real Estate Investors
As a real estate investor, your goal is to make a good return on your investment. It includes making the property self-sufficient and a decent profit you can bring to the bank.
Before buying investment properties, you need to carefully consider all the aspects involved in the investment. More than just the housing prices, you must also consider how much profit you can make depending on your investment strategy.
Each strategy entails different capitalizations. House flippers might spend a lot more compared to micro-flippers and those who are using the BRRRR strategy. A rental property investor who rents out a property long-term will get a different monthly rental income compared to one who starts an Airbnb business.
It is why you need to perform your due diligence before buying income properties for sale. A thorough real estate market analysis will help you make the most of your investment money.
You can easily do thorough analysis with a website like Mashvisor, which specializes in data analytics. Mashvisor can help you perform a proper investment property analysis and help you locate the right property that fits your needs. You can use its investment property calculator to determine whether a property is worth investing in or not, given today’s economic climate.
You can use real estate websites like Mashvisor to analyze potential investment properties and find the right one for your needs.
Inflation Rate and Rent
Although the main subject of discussion when it comes to inflation is gasoline prices, the soaring rental rates are worth paying attention to, as well.
In February 2022, RedFin reported that rent prices rose to a record in January. According to RedFin’s report, the average monthly rent for January 2022 was already at $1,891, a 15.2% year-over-year increase.
Also, CNBC recently reported that the national average for rent prices was $2,495. That’s a whopping 13.4% year-over-year increase.
The pandemic affected the movement of people from major urban areas to the suburbs. It caused the rental rates to go up in other more affordable areas since the demand for housing went up. And while things seem to be going back to the way they were pre-pandemic, people still find themselves faced with higher costs of living regardless of whether they’re in the city or not. It includes higher rent, which is already a national phenomenon.
Higher rents are directly connected to the continuous increase in housing prices. Since housing is becoming less affordable, many individuals are left with no choice but to rent houses at the moment. As a result of the increasing demand for rental properties, rental rates across the country are spiking.
Real estate investors are taking advantage of the slower home sales and still-reasonable mortgage rates to buy rental properties to meet the housing demand. And while landlords seem to enjoy the upper hand in such a situation, vacation rental owners are also increasing their rates because of inflation’s impact on all other consumer goods.
Top Locations for Traditional Rental Properties
According to Mashvisor’s recent data, here are the five best states with the highest monthly traditional rental income:
1. La Quinta, CA
- Median Property Price: $955,395
- Average Price per Square Foot: $423
- Days on Market: 61
- Monthly Traditional Rental Income: $4,333
- Traditional Cash on Cash Return: 3.59%
- Traditional Cap Rate: 3.63%
- Price to Rent Ratio: 18 (medium)
- Walk Score: 22
2. Hawthorne, CA
- Median Property Price: $980,423
- Average Price per Square Foot: $645
- Days on Market: 52
- Monthly Traditional Rental Income: $4,150
- Traditional Cash on Cash Return: 2.91%
- Traditional Cap Rate: 2.94%
- Price to Rent Ratio: 20 (high)
- Walk Score: 87
3. Aventura, FL
- Median Property Price: $834,370
- Average Price per Square Foot: $450
- Days on Market: 85
- Monthly Traditional Rental Income: $3,787
- Traditional Cash on Cash Return: 2.70%
- Traditional Cap Rate: 2.75%
- Price to Rent Ratio: 18 (medium)
- Walk Score: 71
4. Thousand Oaks, CA
- Median Property Price: $980,094
- Average Price per Square Foot: $517
- Days on Market: 37
- Monthly Traditional Rental Income: $3,786
- Traditional Cash on Cash Return: 2.58%
- Traditional Cap Rate: 2.61%
- Price to Rent Ratio: 22 (high)
- Walk Score: 66
5. Palm Springs, CA
- Median Property Price: $957,958
- Average Price per Square Foot: $524
- Days on Market: 46
- Monthly Traditional Rental Income: $3,778
- Traditional Cash on Cash Return: 3.11%
- Traditional Cap Rate: 3.16%
- Price to Rent Ratio: 21 (high)
- Walk Score: 59
The locations stated above were chosen based on the following criteria:
- Markets with at least 100 traditional rentals listed
- Median Property Price below $1,000,000
- Cash on Cash Return of 2.00% and above
- Price to Rent Ratio of 15 and above
Related: How to Succeed With Traditional Rental Properties
Wrapping It Up
Inflation is something that you will need to deal with as an investor, whether you like it or not. Some days may be better than others but the bottom line is that it influences the movement of housing prices 2022. And with inflation going down a bit now, other factors come into play that keep housing and rent prices on an upward trend.
Despite the current increase in housing prices, now is still a good time to invest in rental properties, given the continuing growth in rental rates and the slowdown in home sales. However, make sure you also do your due diligence before making any final decisions. Factors like mortgage rates and housing demand might mess things up for you if you overlook them.
Let Mashvisor help you locate the right investment property that aligns with your goals. You will need a reliable source of accurate data and the best rental property investment calculator to make sure you get the most out of your investment.
To start using Mashvisor to find your next investment property, click here to sign up for a 7-day free trial today, followed by 15% off for life.