How inflation is affecting the US real estate market in 2023
Inflation is a major concern for the US real estate market, particularly given the current economic climate. With the Federal Reserve focused on maintaining price stability, tightened monetary policy and rising interest rates will likely result in upward pressure on cap rates and market volatility. Despite this, real estate transaction volume is expected to remain strong in the near term.
The COVID-19 pandemic has had a significant impact on the US economy, causing a demand shock that resulted in skyrocketing unemployment and reduced household incomes. While market volatility has been high, the Federal Reserve’s extensive policy response, including extended UI payments and cash infusions to support consumption, has helped to mitigate the impact.
However, the pandemic has also resulted in a supply shock, which has driven inflation higher than the Federal Reserve’s stated policy of two per cent. This has been particularly evident in durables consumption, such as furniture, which has increased substantially compared to pre-pandemic levels. Shipping costs associated with durables have also increased substantially and remain elevated.
To address this, the Federal Reserve has shifted its focus from labour markets to price stability, signalling substantial rate increases in the medium term. It has also announced a “run-off” in its balance sheet, which will likely place upward pressure on long-duration Treasuries and cap rates.
In conclusion, while macroeconomic signals are mixed, the sustained pandemic supply-chain problems and policy errors remain a significant threat to continued economic growth. While a recession is unlikely in the near term, it is important for those involved in the US real estate market to closely monitor inflation and interest rates and adjust their strategies accordingly.