It’s June 2021 and things are starting to feel normal again. The pandemic isn’t over, but masks are going away, people are starting to travel again, rental rates are rebounding, and with any luck, the eviction moratorium will also end soon. Looking back, the pandemic taught us many lessons about perseverance (homeschooling, isolation) and innovation (remote work, contactless everything), but also grounded us in demonstrating that what really matters is the people in our lives. We hope you will spend the summer with the people most important to you.
- May Jobs Report - The U.S. Economy added 559,000 jobs in May and the unemployment rate fell to 5.8% - the lowest reading since March of 2020. While a big improvement over April’s numbers and a positive sign in the overall jobs recovery, the May report marked the second consecutive month of missing analyst expectations. America is still down approximately 7.6 million jobs since the start of the pandemic, so even at half a million jobs added per month, a full recovery will take some time.
- Jobless Claims - Initial jobless claims for the week ending June 5th came in at 376,000, falling for the 6th consecutive week. The report marks 2 weeks of under 400,000 claims as we inch closer to the pre-pandemic weekly average of approximately 200,000. Continuing claims remain elevated with 11.5 million Americans claiming benefits under the Pandemic Unemployment Assistance or Pandemic Emergency Unemployment Compensation programs. Locally, new claims fell by almost 20% from 3,103 to 2,490.
- Inflation Soars - According to Thursday’s report from the Bureau of Labor Statistics, inflation rose at 5% in the past 12 months - the biggest jump since 2008. It’s no surprise that prices were going to climb following pandemic fueled supply chain issues and heightened demand, but economists expect those figures to ease back into the 2-3% range during the last half of the year.
- Utah Ends COVID-19 Restrictions - With the exception of schools, Utah has officially ended all Coronavirus restrictions. Last month, the Utah Department of Health issued a new public health order that makes all other restrictions (including mask mandates) unenforceable.
Real Estate and Inflation
It’s everywhere you look these days. Whether you turn on the news, read the business section, or go online, you will find content about things costing more today than they did previously. It seems that the price of almost everything (from lumber to used cars to real estate) is hitting record highs. In fact, just yesterday, the Bureau of Labor Statistics reported 5% year over year inflation - the largest increase in 13 years.
What is inflation?
Inflation is defined as a general rise in price level in an economy over a period of time. Simply put, as time goes on and prices inflate, the buying power of a dollar becomes less and less. For example, in 1930 milk cost 26 cents per gallon. In 2018, a gallon of milk set you back $2.90, so the “milk purchasing power” of that same 26 cents has eroded significantly in the past 88 years.
How can you protect yourself against inflation?
Since inflation is a natural occurrence in an economy, investors can hedge against it by investing in asset classes that tend to outperform the market during periods of inflation. Common asset classifications that fit this description include gold, commodities, Treasury Inflation-Protected Securities (TIPS), and real estate.
What makes real estate an attractive investment during inflationary periods?
There are three characteristics that make real estate a good hedge against inflation and those are appreciating values, increasing income and depreciating debt. Let’s examine each:
- Appreciating Values - Look no further than the “Utah Real Estate Market Section” of this newsletter. In the past year (April 2020 - April 2021), Utahns have seen the median home price for single family homes in Salt Lake, Utah and Davis counties appreciate roughly 29.6%. In this case, the value of your home has increased at a pace that far exceeds inflation.
- Increasing Income - Much like home values, rents have historically increased over time as well. In fact, as you’ll read below, rents in Utah are up nearly 10% year over year. By pursuing renewals with an annual rent increase, your cash flow will steadily increase over time and act as a hedge against inflation.
- Depreciating Debt - When you finance your investment properties using a fixed rate loan product, you also get to take advantage of depreciating debt. Your monthly payment will remain the same, but thanks to inflation, the value of that payment diminishes over time equal to the rate of inflation.
In summary, real estate investing has many advantages and acting as a hedge against inflation is certainly one of them. Of course, we always recommend speaking with your financial advisor when making investment decisions, but we believe investment real estate has a place in any balanced portfolio.
Utah Real Estate Market
The median sold price for single family homes in Salt Lake, Utah and Davis Counties has officially eclipsed the half million dollar mark and sits at $505,000 at the end of May 2021. Truly remarkable to think that just 5 short months ago, that figure was over $66,000 lower. Although, it is important to note that month over month, the numbers appear to be stabilizing.
Median Sold Price
Monthly % Change: Up 1.0%
Monthly % Change: Down 0.56%
Average Number of Active Listings
Monthly % Change: Up 1.2%
- Serious Delinquency Rate decreases in April - Mortgage giant Freddie Mac announced that the Serious Delinquency Rate (90+ days behind or in foreclosure) for April fell to 2.15% from 2.24% in March. For context, this number peaked at 4.2% in February of 2010 (following the housing bubble) and reached 3.17% in August of 2020 (Pandemic) so the financial picture for homeowners is definitely trending in the right direction.
- Rent Growth Erases Pandemic Declines - According to Apartment list, national median rent growth has officially erased all pandemic-driven declines. Overall rents increased 2.3% from April to May and have climbed 5.4% year over year. Locally, rents in Utah are up 2.48% month over month and 9.36% year over year so we are trending above the national average.