A bunch of cash and finally some ways to spend it sound like a formula for inflation as America begins to recover from the pandemic.
"Between the closed theaters and restaurants, the prices slashed by airlines and half-empty hotels, and the government benefits paid or in the pipeline, Americans may have as much as $2 trillion in extra cash socked away by this spring," Reuters said in a piece it posted ahead of the late-January meeting of the Federal Open Market Committee (FOMC).
That piece included this quote from Fed Chair Jerome Powell from earlier in January: "As people return to their normal lives ... there could be quite exuberant spending, and we could see upward pressure on prices."
Fed chair expects 'transient' inflation, will tolerate above 2% for a while
Well, the typical response to inflation is to make money more expensive -- i.e., raise interest rates -- but instead, the FOMC's two-day meeting on Jan. 25-26 resulted in the Fed announcing on Jan. 27 that it would keep interest rates near zero and that it would continue to buy massive quantities of bonds each month.
Powell did say that he expects to see inflation move higher as prices and spending both recover from the pandemic. But he said the Fed would allow inflation to rise above 2% for a while and that he doesn't expect it to last long if it does.
Powell said to reporters after the FOMC meeting: "We're going to be patient. Expect us to wait and see and not react if we see small, and what we would view as very likely to be transient, effects on inflation."
Inflation's impact on real estate investing: widespread and varying
Rising inflation usually means rising interest rates. The effect of that can be widespread and deep, depending on how much and for how long.
For the real estate market, perhaps the most obvious effect would be the higher cost of borrowing. That's for residential and commercial alike, of course. Rock-bottom rates have helped drive the housing market to new heights of activity and prices. Inflation could well put some serious brakes on that action.
But then, a crimp on affordability for homebuyers could drive more demand, and thus higher prices, for rentals. People got to live somewhere.
On the commercial side, meanwhile, higher rates could make investors less ready to pull the trigger on what are otherwise attractively priced assets in great need of buyers. That could possibly hamper economic recovery, too.
Rising rates also could roil the market for those who invest in mortgage-backed securities. That's a huge market and includes a number of mortgage REITs (mREITs).
And speaking of the stock market, what about those real estate-related stocks, like homebuilders, mortgage brokers, and large, diversified property management outfits? They're all vulnerable to the vagaries of interest rates.
The Millionacres bottom line
Predicting inflation's effects is complicated for all sectors, and real estate is no exception. If it's the result of people feeling free to spend cash on travel and eating out and shopping in person, isn't that a good thing for all those owners and operators of malls and hotels and restaurants? Sure, as long as people feel they can afford it.
Plus, higher interest rates aren't just for borrowing. Savers who suddenly are getting something more than zero for secure placements in bank and credit union accounts and CDs of all kinds might keep some money out of the stock market instead of chasing riskier return. That could have an effect, too.
The bottom line right now appears to be that the Fed is going to hold the line on rates and keep liquidity in the market at the same time as the Biden administration pumps stimulus into the economy. Inflation should continue to be modest, and the average investor should have time to react. Just be alert.