Inflations Influence on the Investment Real Estate Market (2023)
The latest inflation data has been released, revealing a noticeable uptick. In July 2023, the Consumer Price Index (CPI) rose to 3.2%, instigating concerns of potential interest rate hikes by the Federal Reserve come September. Yet, the situation is not as straightforward as it seems. There is more to measuring inflation than CPI while the Federal Reserve and investors are going to look at multiple factors.
That is why we are going to break down the inflation number and examine how it will impact the investment real estate market in 2023.
Inflation by the Numbers
Looking at CPI alone will present an inaccurate understanding of the market and inflation. That is why it helps to break it all down to have a better picture of the market.
Core CPI: This is the measurement of inflation while removing food and energy from the equation. It's also the inflation numbers that the Federal Reserve focuses on the most. As of July 2023, it sits at 4.7% and it's continuing to go down.
Service Inflation: Even though it peaked at 7.3% in February, it has been steadily declining every month and it currently sits at 6.1%. Anyalstist believe this is due to the drop in demand because of depleting savings in the money market.
Housing Inflation: This has been a trailing indicator for inflation but it also has been coming down. As of July 2023, housing inflation is down to 6.2% while having peaked at 8.1% back in January 2023.
CPI (Excluding Food, Shelter, and Energy): When you take the core CPI and also take out the housing then inflation sits at 2.5%.
Market Response
With this new information, experts believe that there is a 90% chance that the Federal Reserve will not raise interest rates in September. Meanwhile; they expect a 75% chance of no rate hikes in November and 68% in December.
This along with the Federal Reserve taking it easy with the rate hikes has resulted in a boost of confidence. Consumer Confidence Index has been on the rise and it hits its highest point since 2021. Consumer Sentiment Index tanked in early 2023 but has since been on the rise. CEO Confidence Index along with the Small Business Optimism Index has also been on the rise.
For real estate investors, the Small Business Optimism Index is important to follow. That is because small business optimism works in tandem with transaction counts. When small businesses are more optimistic about the market, a rise in investment real estate transactions follows.
What it Means for Investors
The Federal Reserve has been actively pursuing a strategy of achieving a controlled and gradual descent in managing inflation. Considering the prevailing state of inflation and market sentiment, there's a possibility that they might achieve this objective. Most likely at some point in late 2023 to early 2024. Such an outcome could potentially translate into yet another year of expansion for the investment real estate market.
A smart investor should start planning now by examining their options and reaching out to a market expert. Absolutely do not wait around for things to get better.
The Azucena Take provides an inside look into the investment real estate market using the research done by Marcus & Millichap.