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May 15 2021

Mortar Reports: Fall Market Update

New York Real Estate as an Inflation Hedge

Over the last 12 months, the US government has acted swiftly to stabilize markets and reduce the financial impact of the Covid-19 pandemic. In addition to lowering interest rates to near zero, the government has added trillions to the money supply and dramatically increased the federal budget deficit via various stimulus programs.

While these interventions appear to be helping the markets thus far, the recent monetary policy changes have also sparked a fear of high inflation in the coming years. While no one can know what the future will bring, it is important for investors to understand how inflation works, how a high inflation market can impact your assets or investments, and the best way to protect your holdings.

What is inflation?

Inflation is the rise or increase in the prices for goods and services in a given economy over a set period of time, usually calculated by year. As such, it is the decrease in the purchasing power of the dollar over time. Over the past 10 years, the average rate of inflation in the United States was below 2%. But many experts are now forecasting higher-than-normal rates of inflation in the near future due to the impacts of Covid on the economy. If they are correct, this high-inflation environment will create a reduction in the real rates of return for many investment classes, and as a result cause many investors to seek financial refuge in more inflation-proof investment types. While it may be too early to tell whether the US will continue with near “normal” rates of inflation or if rates will skyrocket in the coming months/years, regardless of the current economics, there are certain strategies that investors can take to hedge against inflation and help their portfolios continue to flourish through uncertain times.

How does inflation affect real estate?

The good news for real estate investors is that during periods of high inflation, real property assets typically perform quite well, with prices rising along with the cost of other goods. Unlike bonds and cash, which lose purchasing power when prices for goods and services are rising, real estate is generally a fantastic hedge against inflation, due to the intrinsic value provided by limited supply and consistent yields.

There’s the old saying in real estate: ‘Buy land, they’re not making it anymore.’

While this seems like a simplistic notion, it lies at the core of real estate’s effectiveness as a store of value. Due to the innate scarcity of real estate assets, demand for real estate remains relatively stable in an inflationary economy, causing prices to rise in tandem with inflation and protecting value. Again, real estate has intrinsic value and is a necessity; people need to have roofs over their heads regardless of the value of their currency. Per a recent study, the Case-Shiller Housing Index reflects an annual return of 0.7% in excess of the inflation rate since 1940, meaning that as an asset class, real estate has not only proved to be a dependable store of value, but it also has consistently provided appreciation over the last 80 years. If land or assets are purchased intelligently, the potential for appreciation can be much higher.

What are some options?

There are three primary ways to invest in commercial real estate. One can a) invest directly in purchasing and managing a property, b) invest money with a REIT, or c) invest and work with a real estate firm like Mortar.

At Mortar, we see residential real estate investments as one of the best hedges against inflation available. By intelligently investing in residential real estate with Mortar, you can create an effective hedge against inflation and protect your capital in today’s economic uncertainty. Over the past several decades, Mortar has developed exceptional expertise in acquiring real estate assets in growing, established neighborhoods, and navigating challenging markets. This experience has positioned Mortar exceptionally well to execute calculated, inflation-hedged real estate investment strategies in the new post-Covid real estate market.