As inflation rise slows, investment questions remain

In the smallest 12-month rise since last December, the Consumer Price Index report issued Tuesday slowed to a 7.1% increase through November, from 7.7% in October and 8.2% in September, but the Federal Reserve increased interest rates by 75 basis points in November for the fourth time in a row, making goods and property less affordable.

According to the Atlanta Federal Reserve’s Home Ownership Affordability Monitor, home ownership affordability declined 30% in September due to heightened mortgage interest rates. The average 30-year fixed mortgage rate is 6.63% nationally and the 15-year is 6.01%, according to NextAdvisor.

Year-over-year appreciation of home prices is 7.5% from September 2021. The median home price in September was down 4.1% from June from $381,218, at peak price levels, to $365,667. In addition, the monthly cost of the median priced home increased 46% over the last year to $2,670, meaning that the average homebuyer would be spending about $851 more to own a median priced home compared to same time last year, according to the Atlanta Fed.

“In simple terms, I do not recommend people buy single-family homes at all, unless it’s to rent them to other people,” said Victor Whitemore, CEO and co-founder of Precision Equity, a multi-family investment firm. “Inflationary periods like this one benefit the commercial real estate investor and really hurt the single-family home buyer. The best thing people can do is to rent their home and invest all their discretionary funds into commercial cash flowing assets.”

Inflation favors the real estate investor, since rising rents raise the value of commercial real estate with huge multiples, he explained. “For every dollar you increase income, you raise the value of an asset by $12 to $20. A single-family home you live in is not an investment. That’s just a huge lie people have been told.”

To cope with the high inflation environment, Owen B. Harvey, Miami-based financial advisor at First Command Financial Services, said it is important to plan for the long-term.

“We try to coach behaviors on clients to be consistent over a long-term, and the details are going to depend on the family,” he said. “We try to look at each individual client’s spending and try to tailor a budget. Inflation will cause some things to be more expensive, but there may be other things that are less expensive, and a good time to purchase. Trying to look at long-term planning and figure out what we can do year in and year out to plan.”

Mr. Murphy said he has seen a heightened stress among his clients caused by the market drops and the increased inflation. “A lot of that feels unknown to a lot of people,” he said. “Historically, high inflation periods are not unusual. Trying to plan around for these ups and downs for the long term and figuring out what you can benefit from in different markets” will put clients at ease, he said.

Some federal economists are seeing the current inflation indexes as signs of improvement. Federal Reserve Chair Jerome Powell said that there has been some progress in easing inflation in physical goods, such as cars, furniture, clothing and appliances, AP News reported. Housing costs nationally continue to rise, but apartment rents and home prices would likely start to show declines next year “and should help reduce overall inflation,” according to AP News.

“None of us know what is going to happen with inflation, if it’s going to come to a stopping point or there will be further increases, but what people can do is prepare for the worst and plan for the best, and figure out a plan to navigate these waters,” said Mr. Murphy. “So, if there are future increases, we’re in good shape and adjusted to come out as best as possible.”