Many people have asked me how increased inflation will influence the Annapolis real estate market. Based on previous history and classic economics, I believe we can expect two specific impacts on the Annapolis real estate market: an increase in demand and a higher cost of borrowing to buy properties. As with other economic challenges, there will be “winners“ and “losers“ as inflation rises.

First, the basic cause of inflation is “too much money chasing too few available products.” If you have 10 houses and five buyers, sellers will compete by lowering the price of their properties. If you have 10 buyers and five houses, buyers will compete and bid up above asking price. This increase in price is essentially the definition of inflation. The good news is that this aspect of inflation benefits homeowners. Scarcity benefits the people who already own the hardgoods.

Inflation is tracked by the Consumer Price Index on a monthly, year-over-year basis. The October Consumer Price Index (CPI) rose 6.2% over the same month last year, while November rose 6.8%. Factors that are contributing to the rise — a level not seen in 40 years — include a labor shortage and supply chain challenges. Groceries and oil/gas cost more, as do construction materials, particularly lumber which was four times the usual price earlier this year. In addition, we have had an increase in housing prices due to these issues. The pandemic has also caused more people to want to buy and fewer people to want to sell. So, because of these factors, we have inflationary pressures in both the new home market and the resale home market.

There are other factors at work in the current economy. The pandemic is causing migration from urban areas to exurban and rural locations. If a given area is adding population, this will increase the inflationary pressures and the value of the properties. If people are migrating out of an area, there will be less demand for houses in that area and you may see a softening of prices or “deflation.“

The downside to inflation as a potential homeowner is that the federal government does not want rampant inflation to slow our economic recovery. The Federal Reserve Bank can try to address inflation by increasing interest rates which have been near zero for quite some time. A move to increase interest rates would also increase the cost of housing. If you are a buyer, consider locking into a loan sooner rather than later to take advantage of these historically low interest rates. For current property owners, it also means that there will be competition between the “scarcity” which will improve your property value, and the higher interest rates which will temper the rate of purchasing. The “cooling down” effect of higher interest rates may also put a small brake on the rapidly rising housing prices we see around us, but it does not appear we are headed for any sort of a major correction due to the desirability of our exurban location in Annapolis.

When you combine this inflationary impact on housing prices with the increased demand caused by hybrid working and remote working, which I have discussed in earlier articles, I think you will agree that the outlook for prices of housing in the Annapolis area can only go up. The Wall Street Journal points this out more eloquently, “Owners of residential and commercial real estate are often better off during times of rapid inflation than owners of stocks or bonds, economists say. Office, retail and apartment rents are typically tied to consumer prices and rise with inflation, pushing up property income. Inflation also makes construction more expensive, which benefits property owners because they can expect less competition from new buildings.”

In my opinion, Anne Arundel County stands to be one of the “winners“ in this economy.

If you’d like to get into a more specific discussion about housing prices in your area and how you can be a “winner” even in inflationary times, please get in touch. I’d be happy to help you think through your options.

Reid Buckley, MBA, is a third-generation licensed real estate agent and waterfront specialist with The Mr. Waterfront Team of Long & Foster Real Estate. She can be reached at 410-266-6880 or via email at Reid@WaterfrontHomes.org. 

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