For the past six months, the Federal Reserve has acted aggressively to thwart the COVID economic crisis. It drove interest rates close to zero and bought massive amounts of securities. If you add these steps to the $ 2.2 trillion CARES bill, the federal money supply and budget deficit will increase tremendously.
In a new report, Patrick Lynch, Middleburg Communities Vice President Research and Analytics, wonders how many observers are these moves going to lead to inflation in the future. And if so, the multi-family asset class will continue its traditional role as a hedge.
To be able to predict the future, Lynch looks back to the 1970s– –The last time the US saw a sharp rise in inflation– –and compared the annual average rental growth rate to the average inflation rate from 1973 to 1983 by examining three data sources.
Looking at the personal consumer spending price index, rents rose slightly less than headline inflation but slightly higher than core inflation excluding food and energy. The consumer price index (CPI-U) shows that rents rose at an average annual rate of 6.7%, but were below the average annual inflation rate. The American Housing Survey found that the median rent rose an average of 8.5% a year, according to Lynch, outperforming all inflationary measures.
Lynch notes that the average year CPI-U measurement is a little exaggerated due to the treatment of mortgage rates, and gives more weight to the PCE measurements. If you look at the AHS data, which uses constructed units to calculate the average total rental growth, growth has likely exceeded inflation over this period.
“The history of housing rents in the 1970s and early 1980s shows the resilience of the multi-family asset class and its strong potential as a hedge against inflation,” writes Lynch. "Despite weak employment growth and high unemployment, housing rents kept pace with inflation in the most inflationary period in post-war US history."
Better positioned now
Lynch believes that with sophisticated day-to-day pricing tools, homes today are “better positioned to respond to inflationary pressures than they were forty to fifty years ago”.
For example revenue management, which didn't exist in the 70s, can take the guesswork out of pricing decisions.
"By considering factors such as engagement, market conditions and competition to generate targeted rental recommendations, management can increase most of lease demand while optimizing revenue," AppFolio's Stacy Holden told GlobeSt in an earlier interview.