Investors Bet on Real Estate as Inflation Hedge
Real Estate Less Price Sensitive Than Other Investments
Some investors looking for protection from rising inflation are turning to real estate. Real estate stocks are up 14% this quarter so far, outperforming the broader stock market.
Many investors are moving into real estate because they are concerned that rising prices will chip away at company profits and prompt the Federal Reserve to raise interest rates earlier than forecasted. Historically, real estate has been an attractive investment during periods of rising inflation because rents are less price-sensitive than other goods and services. Consumer prices rose 5% in May—the biggest jump in close to 13 years—which has caused many investors to be concerned about price-sensitive industries and to turn to real estate.
Real Estate Stocks Surge
Boston Properties (BXP) and Equinix (EQIX), two large real estate companies, have seen their shares surge about 20% since the start of the quarter. Earlier this week the real estate sector was trading at nearly 24 times next year’s earnings. In comparison, the S&P 500 was trading at about 21.5 times future earnings.
These trends contrast with last year when the real estate sector fell 5.2% amid pandemic shutdowns. Shuttered restaurants and shops and a shift to remote work left buildings vacant. Mall operator Simon Property Group (SPG) saw its shares fall 43% in 2020. So far in 2021, the stock is up 54%.
Real estate investments can differ greatly. Investors looking to break into real estate have to pay close attention to the terms of leases. Office and retail rental leases can last for years, so it’s important to adjust for inflation.
If inflation continues to climb, it could fuel even more investor interest in real estate. If inflation slows down heading into the fall as some predict, price-sensitive companies may become more attractive to investors. Time will ultimately tell where inflation ends up, but for now real estate seems to be a popular way to try and hedge against it.
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Liz Looks at: the Fed’s June Statement
A Weekly Column With Liz Young
Every week, SoFi’s Head of Investment Strategy shares her economic and market insights in order to help empower readers to take a more active role in their financial futures. This week, see what Liz has to say about the June 16th Fed statement.
Taper Tease, Rate Rethink
In this week’s much anticipated Fed meeting, the Federal Open Market Committee (FOMC) held rates steady in the range of 0–0.25% and held monthly asset purchases steady at $120 billion. Many were wondering whether the Fed would signal tapering their asset purchases and were met with an anticlimactic “not yet” signal. What did come out of the meeting was an increased possibility of a rate hike in 2022 and two hikes in 2023 as reflected in the new FOMC dot plot.
The market’s initial reaction to the news was negative, which is natural—I’ve never met a market that liked the prospect of rate hikes. But in the wise words of Wharton’s Jeremy Siegel, this is likely more of a tremor than a tantrum.
Digesting the News
Realistically, nothing has changed for the near-to-medium term. All voting members of the FOMC still support keeping rates near zero for the remainder of 2021. As we know, however, the market is a discounting mechanism and looks out into the future, trading on expectations not events. This is a period of digestion while investors evaluate what an earlier rate hike might mean for stocks and bonds.
Let’s keep in mind the timeline. The Fed swiftly went to zero back in March 2020 when we were thrown into a financial frenzy by a global pandemic. We sit here today, 15 months later, with an economy that’s nearly back to pre-pandemic levels of GDP, inflation that’s come back to life, and consumers who are eagerly spending on services again as they’re welcomed back by businesses everywhere.
We’ve come a long way.
The Emergency is Over (at Least for Now)
With that backdrop, it actually seems naive to assume we wouldn’t raise rates until 2023. A Fed policy rate near zero is fit for an emergency situation—one where the economy needs stimulation to grow and create jobs. We are not yet finished with the recovery, but the emergency seems to be over.
At some point then, rates need to go up. Carefully raising rates can help inflation stay contained and, maybe more importantly, can give us some tools to work with in the NEXT recession, whenever that may be. Markets have gone up in rate hiking cycles before, and they can again, if we’re careful.
-Liz Young, Head of Investment Strategy at SoFi
Changes in the Housing Market
Home Renovations No Longer Drive Sales
With the real estate market booming, home sellers hoping to get top dollar for their property may think they have to pour thousands of dollars into upgrades and renovations. But that may not be the case, depending on the location and condition of the home.
Without a doubt, staging a home is important, even in an environment with a low inventory of available houses for sale. First impressions are everything in real estate, and updated homes tend to compete better against new construction. Still, staging a home does not have to require a complete overhaul, the way it did in the past.
Location plays a big role in whether a home seller needs to spend money on upgrades. In some markets where inventory is available, buyers will pay a premium if a home is upgraded and move-in ready. But upgrades are not necessarily required in markets where inventory is extremely tight. In markets with very little inventory, there are typically bidding wars on any homes that go on the market—even homes which have not been upgraded recently.
For homes that will benefit from upgrades, consider choosing one of the top home improvement projects to increase a home's value. Projects which improve curb appeal tend to be most beneficial to sellers.
Some Brokers Will Front Money for Upgrades
With homes commanding premiums in sales, some real estate brokers are willing to pay for the upgrades if it means they can list the property sooner. The brokers get paid back once the sale is complete. They typically do not charge any interest or fees on these loans. For homeowners who do not want to deal with upgrading their home, several online services will buy houses as-is. These online real estate companies resell the properties after making repairs and upgrades.
Without a doubt it is a seller’s market, but what exactly that means depends on a home’s location and other factors. Unless a property is among the only ones available, some upgrades may be in order, but generally these projects do not have to break the bank.