The year 2021 will be remembered as the year of inflation.
Almost all real estate has seen increases in value. Due to the rapid increase in materials cost earlier in the year, the cost of construction jumped significantly, which led to an increase in the replacement cost of proposed properties and impacted existing property sales.
Sellers began asking higher prices. Buyers, with the benefit of lower interest rates, were able to afford the higher prices while not increasing their payments.
In today’s housing market, there appears to be more buyers than sellers.
The COVID era decreased the number of sellers but increased the number of buyers, which helped push property prices upward.
Meanwhile, new construction has decreased due to increasing costs.
One of the problems in the appraisal world is that we appraisers are so busy looking backward at historic data that we often fail to see the changes in the market going forward.
One way to help account for the increases is by developing the current cost approach to value and giving the increase in replacement cost consideration in the value.
So far in 2021, inflation has increased about 1% per month, which is a fairly rapid increase; however, when looking at specific building items, like a 2 x 4 piece of lumber, prices have jumped over 100%. Some construction project costs have increased as much as 50%.
Even the inflation rates for S&P 500 stocks are projected to increase over 30% in 2021.
Inflation rates of that magnitude in the real estate market could out-run the interest rate savings and cause a slowdown in construction and sales.
I wish I knew the answer to how to calm the market, get the supply and demand chain back in sync, and restore the economy in an orderly manner. Keeping interest rates low is clearly a motivating factor in the sale of real estate, but it is also an inflation growth factor.
Hopefully we can find an interest rate and price point that will allow economic recovery and allow for minor financial growth.
It appears that homeowners, businesses, and investors continue to be concerned about the condition of the current economy and the uncertainties of the solution.
A.J. Burns is a real estate appraiser based in West Monroe.