Recently I received a nice email from my local Realtors’ association, thanking me for being a member for the past 8 years. They shared some stats that seemed so nice at the onset: the median sold price in my county in 2015 was $152,000, and the current median sold price is $281,000. Meanwhile, the average interest rate for a 30-year fixed loan in 2015 was 3.85%, and today it’s 7%.
These stats made it easy to see a striking fact: in only 8 years, the median price had almost doubled, rising 84%. Let’s stop for a second and think about that. If you did not own real estate, the purchasing power of your dollar has shrunk significantly over that time.
Inflation Rates Since 2015
Since 2015, the U.S. has experienced varying inflation rates. The annual inflation rate, measured by the Consumer Price Index (CPI), has seen periods of acceleration and deceleration. In 2015, the inflation rate was relatively modest at around 0.12%. Subsequent years witnessed fluctuations, with a notable increase to 2.44% in 2018, and the rate remained above 2% in the years that followed, reaching 2.33% in 2019 and 1.23% in 2020. The rate for 2021 was 4.70%, and 2022 came in at 8.00%.
If you do the math based on the housing numbers above, the average inflation on real estate has been 10.5% yearly over the past 8 years.
Real estate will fluctuate up and down, but over time it will rise in value to counteract inflation. During periods of heavy inflation, it tends to rise right along with it, protecting your dollars. Just ask your Uncle Henry how much he paid for his first house back in 1970. Exactly.
Impact on Purchasing Power
Let’s talk investments. In 2015, the average selling price for a Class B apartment complex in Central PA with 25 or more units was $60,000 per unit. By 2022, that had climbed to $106,000 per unit, an increase of 76%.
While cap rate is a more accurate reflection of a property’s value, cap rates fluctuate relative to the lending and interest rate environment, which is evident right now. Over time, rising rents drive up net operating income, which is then reflected in the price-per-unit metric, building a real wall between your wealth and the eroding effects of inflation.
