Real Estate Isn’t as Safe From Inflation as You Think

Dave Meyer:
Is real estate actually a good hedge against inflation? That has long been the logic that holding physical assets like real estate can help protect against inflation. But is this actually true? Are all inflationary periods the same? And does real estate always react the same way? This is a really important question right now and one I’ve personally been spending a lot of time on because even though inflation is far better than it was in 2021, 2022 and so on, inflation risk remains stubbornly present in our economy. From tariffs to the conflict in Iran, to the rising national debt, there are reasons to want to protect yourself against future inflation. The question is, is real estate that protection that you need? Some would immediately say yes to that question, and there is some truth to that, but there is actually a lot more nuance to it. It is not as simple as saying real estate is a great inflation hedge.
You can protect yourself and your portfolio against inflation using real estate, but you need to listen to this episode to know exactly how to do it.
Hey everyone. I’m Dave Meyer, Chief Investment Officer at BiggerPockets. Welcome to On the Market. Today on the show, we’re digging into a topic we haven’t touched on much recently. We’ve talked about a lot in recent years, but it’s been a while since we touched on inflation. And we haven’t been talking about it because thankfully, mercifully, inflation is down from its highs during COVID when we reached up to 9.1%. But the inflation, nuisance, and risk has not altogether left the economy. If you listen to this show, you know that I’ve been saying for years that we are not out of the woods on inflation and I still believe that. It is one of the reasons I’ve said rates wouldn’t come down that much. And so far, that opinion has been proven correct. With ever-changing tariff policies, now we have a war in Iran that has sent oil prices up rapidly.
I think the risk of inflation is going to remain with us for a while. And plus, I’ve talked about this on the show before. I also have these long-term inflation fears that stem from government monetizing our massive national debt, trying to print our way out of it. And although that’s not a this year issue, it’s all the more reason I am personally going to try to position my investments to protect myself against the potential for future inflation. And I want to help all of you do that as well. And this is where we turn to real estate. People love to say real estate hedges inflation. And lucky for us in this industry, there is a lot of truth to that, but not all real estate performs the same. Not all inflationary periods are the same. There are actually different kinds of inflation. We have demand side, we have supply shock, we have monetization of debt.
And building an inflation-proof portfolio takes an understanding of what’s really going on behind the scenes. And that’s what we’re going to do today. We’re going to start by talking about the historic relationship between inflation and real estate. We’ll talk about what the actual mechanics are and which elements of your real estate deals are the best for inflation hedging. Next, we’ll talk about the different kinds of inflation and what we’re seeing now. Then I’ll walk you through four different scenarios for what could unfold in the coming years, and we’ll finish up by talking about what you should do about it. Let’s get into it. So first up, let’s just answer the question, is real estate actually an inflation hedge? Because real estate has long been considered one of the best inflation hedging assets. But the reality is actually a little bit more nuanced than that headline.
And although I’ll just get this out of the way, I will say yes, there is a strong correlation between real estate prices and inflation, a very strong correlation for those nerds out there. It’s 0.94. One is the highest, so that is very high. But there are actually four different ways. There are four distinct mechanisms for how real estate hedges inflation, and it’s not just prices going up. So we need to dig into each of these to understand how we want to structure our portfolios around each of these four mechanisms to make sure we’re protecting ourselves against the types of inflation that we might see in the future. Does that make sense, right? Not every type of inflation is the same, and not every type of inflation corresponds to real estate strategies in the same way. So we really need to understand all of this. I’m going to go through four mechanisms right now.
I think this will make sense to all of you. It’s not super nerdy or anything. This is going to be pretty intuitive. But mechanism one, that real estate hedges inflation is asset appreciation. Property values go up when inflation goes up. Replacement costs to build new buildings go up. And when it costs more to build new buildings, the existing housing stock is worth more. We’ve seen this a lot. There’s a lot of evidence about this. Again, the correlation between National Property Price Index to the CPI is 0.94. But if you look back at historic areas of inflation, in the late 70s, we saw inflation in the double digits, like 11%, but home prices went up 18% at the same time. In 1980, for example, we saw the CPI hit nearly 16%, which is awful. Home prices though went up 20%. So this is mechanism number one.
Over the long run, property investors have beaten inflation about 85% of the time across any five-year period that you picked going all the way back to 1985. That’s mechanism number one. Hopefully that should make sense. Mechanism number two, the second way that real estate hedges inflation is rent income, because as inflation goes up, rents rise as well. They’re sort of inextricable, right? Because rent is actually 40%-ish of the inflation rating. So if inflation is going up according to the CPI, there’s a very good chance that the reason it’s going up is because of rents. We saw this in 2022 and 2023, but this is a great way that real estate hedges inflation because as your expenses increase because of inflation, your revenue keeps up and that’s a great way to hedge. So that’s mechanism number two. Mechanism number three is debt devaluation. Now this one’s a little bit wonkier, but I think this will really make sense to people.
And it’s also, I think, probably the most underappreciated way that real estate hedges inflation. I think this is incredibly valuable. It’s one of the reasons I always talk about on the show the value of fixed rate debt, because when you borrow at a fixed rate, when inflation comes, it means that the dollars that you are paying back to your lender are actually worth less. The nominal balance, the amount you pay on paper stays the same, right? You are always paying, let’s say, $2,000 a month for that mortgage. But if you started and originated that mortgage here in 2026 by, let’s just call it 2036, 10 years from now, inflation will have eaten away the power of your dollars. And so even though you’re paying the bank the same $2,000, it’s actually more like 18 or $1,700 in spending power. I’m just making those numbers up, right?
Those are just a broad example, but it means that over 30 years, you are paying the bank back with increasingly devalued money, which is good for you. That is a really good way to hedge against inflation. So that is mechanism number three. Again, that really only works when you have fixed rate debt is one of the knocks against adjustable rate mortgages. One of the reasons I love fixed rate debt. Mechanism number four, I’m cheating here. There are probably three real mechanisms, but I do want to just throw in tax benefits here as well, because they’re basically the same as usual. They don’t change during inflationary periods. You still have depreciation and cost segregations and 1031s, but they can be even more valuable during inflation because rising rents, rising values when you’re getting your assets are going up, your rents are going up, that’s great, but it also creates more taxable income for you.
And so if you can depreciate away some of those gains from a tax perspective, that can be particularly valuable for real estate investors. So just as a summary here, the four mechanisms, the four ways that real estate hedges against inflation are number one, asset depreciation, property values go up typically when inflation goes up. Number two is rent income. Number three is that fixed rate debt devaluation, and number four are the tax benefits. Hopefully all of this makes sense to you. There are four ways to hedge inflation, but not all inflation is the same. And depending on the type of inflation that we see, some of these benefits might be present and some of them might not be. Not all four mechanisms are available or are beneficial depending on the type of inflation there is. So now we need to turn our conversation now to what are the types of inflation?
How does it vary? Because everyone sees the prices going up, but not many people spend some time thinking about why are these actual prices going up? And the cause of that inflation is going to help us dictate what real estate strategies we want to use to hedge against this risk. People have all sorts of different types of definitions for inflation, but I’m going to sort it into two buckets. This is sort of like one of the more classic economic analyses of inflation. You have either demand pull, that’s one type of inflation, or cost push. Those are the two types, demand pull and cost push. I’ll explain them briefly. Demand pull inflation happens when the economy is growing fast. Employment is strong. Consumer businesses, they’re spending, they’re hiring. And at that point, demand exceeds supply and prices rise. This is Econ 101, right? When you have too much demand for too little supply, or some people refer to inflation as too much money chasing too few goods, all of those descriptions are demand pull inflation.
That’s what causes prices to rise. We’ve seen many examples of this in the late 1970s. We saw this from 2020 to 2022 with the stimulus surge. Yes, a lot of the inflation we saw during the pandemic was because of money printing. But in this framework for thinking about inflation, that is because it created demand, right? People had more money, so they were going out and spending. We did not have a corresponding increase in the amount of stuff that we wanted to buy, and that pushed inflation up. I’ll just give you an example, right? Like cars. Cars got super expensive during the pandemic. It’s because a lot of people had more cash. We were printing money, right? Stimulus checks, all this money was flooding the market. That increased demand. People are like, “I got money to spend. I’m going to go buy stuff.” But they can’t turn a switch and make more cars fast enough to correspond to that demand.
Not to mention the chip shortage that was going on, but hopefully you get the point. People had more demand, supply stayed the same or actually went down a little bit. That pushes prices up. That is demand pull inflation. The second type of inflation that we’re going to talk about is called cost push inflation. And this happens when input costs rise due to supply shocks, geopolitical stuff going on, tariffs, not because demand is strong, right? So maybe there is a shortage in aluminum, and so cans get more expensive. Right now, particularly relevant, maybe oil has gotten more expensive. And as you probably know, oil goes into just about everything in our economy. So if oil becomes scarce or more expensive, prices tend to go up because of that. Now, demand over the last couple of weeks hasn’t necessarily changed for plastic or for oil, but we just saw yesterday the price of plastic is going up a lot.
Oil is going up. We’re going to see shipping costs going up, not because demand has changed, but because the supply side has gotten more expensive. Again, we’ve seen this a lot. We saw it in 1973, the whole oil embargo that pushed up oil prices that led to a lot of inflation. This also happened during the pandemic. I just mentioned cars, but there was all sorts of supply chain issues during the pandemic. I’m sure we all remember that. And honestly, it’s kind of happening right now. The top line CPI number isn’t that high, but tariffs are increasing supply costs.This is definitely true. You could read any sort of report on this stuff. Tariffs are increasing input costs and that also can lead to inflation. Now, unlike demand pull, which is sort of associated with a strong economy, supply push is kind of the opposite, right? It is more typically seen with rising producer prices.
They have lower margins and lower profits and generally lower economic growth. So now you’re starting to see why we might want to act differently if we have demand poll inflation or we have supply push inflation because one’s more associated with strong growth, the other is not associated with strong growth. And how those things interact with real estate are really different. We are going to talk about that in just a second and how to sort of match the real estate mechanisms to the types of inflation. But I just want to call out too, these two types of inflation, right? You can get both of them at the same time. This is what most people … This is one definition, I should say, of stagflation. It is, in my opinion, the worst combination. It’s not good. It is really bad for the economy. You basically get this cost push inflation where input costs are going up alongside rising unemployment, stagnant economic growth.
It’s so bad for so many reasons, right? First and foremost, it makes monetary policy almost impossible. The Fed can’t cut rates because that would worsen inflation, but they can’t raise them too aggressively because that would worsen unemployment.This is what we saw in parts of the 1970s until Paul Volker just decided he was going to crush inflation. Even if that sent unemployment rate up, it actually worked, but it was definitely painful. And so stagflation is definitely something we need to keep an eye on because if you are concerned that the economy is slowing down, but we are still seeing prices rise because of supply push inflation, that can lead to stagflation. And I’ll get to the scenarios in a little bit. We’re not in stagflation right now despite what some people say, but the risk is absolutely there. All right. Next, let’s talk about how each type of inflation actually impacts real estate specifically.
This is where we start to figure out how we’re going to orient our portfolio and investing decisions based on the type of inflation that we see. We do, however, have to take a quick break. We’ll be right back.
Welcome back to On The Market. I’m Dave Meyer. We’re talking today about inflation and how real estate is a good inflation hedge, but you need to know the type of inflation that you’re facing and how to position your portfolios accordingly. Before the break, I explained the difference between demand pull inflation, which is when the economy basically overheats and cost push inflation, which is when input costs rise, basically the cost to make stuff goes up and so prices go up. We want to now talk though about how each type of inflation impacts real estate specifically. When you have demand pull inflation, this is again the kind that is associated with a stronger economy. All four of the mechanisms that we were talking about before, just as a reminder, that’s asset prices going up, rents going up, tax benefits, and debt devaluation, all of those things work together.
This is kind of a good environment for real estate investors. You have strong employment means tenants can absorb rent increases. They can still say low. If you’re in commercial real estate, your NOI rises, right? On top of that, rising wages support home prices. They might go up, they might stay flat, but they at least support them. And when people are feeling good, buyers stretch to qualify that increases demand. So all of these things work together. So when people typically say real estate is a great hedge for inflation, what they mean probably is that when you have demand to pull inflation, real estate’s actually a great industry to be in. This is one of the best assets, the best ways to position yourself for inflation. Now, I want to get to where we are today because I’ll just give you a preview. I don’t think we’re in a demand pool inflation environment, but I wanted to explain this because we will be in a demand poll inflation environment sometime in the future and I want you all to be prepared.
But right now, I think the risks that we have are more on the cost push inflation. And so let’s talk about how that impacts real estate. The reality is that not all four of those mechanisms that we talked about work and they sort of work unevenly, right? Because remember, that cost push is associated with a weaker economy. What happens is replacement costs rise. So this is true, construction costs go up, and that’s actually kind of good for existing owners. If you own a portfolio, you own your home, that is going to put a floor on how low the value of your property can go, right? Because if it’s going to cost more to completely replace it, that keeps the prices of existing homes higher, right? But at the same time, demand is going to get weak. There’s not going to be as many people who want to go out and buy your property.
So even though you have a nice floor for how much your home could go up, your home values might actually not go up in a cost push inflation environment, and I would argue that they can actually go down. The second thing is although rent will probably stay the same, they might not go up. If people are struggling with general affordability across the economy, it suppresses rent demand. People won’t go out and form households or stretch for that more expensive apartment. And so I think when you’re in a cost push inflationary environment, you are less likely to see home prices go up and rents go up, and they might not go up at all. And I think that is a really important insight here. People hear inflation, they think prices go up. That is not necessarily true if you are in a cost push inflationary environment or a stagflation environment.
If there is no demand, even if supply prices go up, that does not mean that asset values will go up. I just, that is one thing I really, really want people to understand because that is the one way you could get yourself in trouble in real estate is if you buy something in an inflationary environment thinking inflation equals asset prices go up and then asset prices don’t go up, but your expenses are going up and your rent is staying flat, that is a situation for trouble. And it’s something that we’re going to talk about more in just a minute because that’s something I want you all to avoid. The last thing I’ll just say is stagflation. Again, we don’t know if we’re there yet. There are some risks of this, so I want to mention it, but when you have stagflation, this is really where the hedge kind of just breaks down, to be honest.
If you have high inflation and high unemployment, there’s almost no way to win. It’s not just that real estate isn’t a good hedge. It’s such a bad economic combination that there’s almost no way for anyone to win, right? You have tenants who might lose their job to rising unemployment that can’t pay rent, vacancy rises even as operating costs go up. So that means you’re going to be making less money, but you’re going to have more expenses. Buyers lose their jobs or face flat wages or whatever, which means that demand for reselling homes goes down, which means home prices could fall, maybe not nominal terms, but in real terms, probably. Cap rates are probably going to rise. And unfortunately, the Fed’s going to be trapped. They can’t cut rates to support the market without worsening inflation. And so you’re going to have a delay in any sort of rate relief.
Now, you still do get some benefit that fixed rate debt devaluation, that still is happening. So you get some relief and depreciation and tax benefits are still there. So you still get some relief there. But I just wanted to call out, like what I’m trying to emphasize in this episode is that in these types of environment, whether it’s a cost push or stagflation, you are not going to get all four of those mechanisms that benefit real estate investors during inflationary periods. That comes during demand pull. Okay. So those are the general ways how real estate reacts to inflation, but what type of inflation risks are we actually facing today? Is it demand pull? Is it supply push? Is it stagflation? I’ve kind of given you some of my ideas behind that, but we’re going to get into that in detail. Then we’re going to talk about four different scenarios that could actually play out and how you should adjust your portfolio accordingly.
So let’s get into it. Let’s talk about this. The current climate, what inflation risks are real estate investors and just everyone in America actually facing today? As you probably know, things have gotten a lot better in the last couple of years. We peaked in terms of the CPI, the consumer price index, primary source that most people look at for inflation. That went up to 9.1% is wild. In June of 2022, it was the highest in over 40 years, but by early 2025, it had declined to 3%. It was kind of on a long downward trend, but it’s been stubborn. For the last couple of years, it’s remained around three. It’s basically flat from where it was a year ago. It was going back down. Then tariffs were announced on the liberation day on April. After that, inflation went back up. Now went back down a little bit.
But I think most people believe that because of the Iran situation, CPI is going to go back up. Oil prices, gasoline, energy prices, big part of the CPI. It goes into everything. Shipping, right? Everything you import or export, that’s going up because ships use diesel, right? Construction’s going up. They use diesel. Plastic has a ton of oil. I mean, plastic is made out of oil. So all of that is going to go up. All of these input costs are going to go up. I don’t know if that’s going to show up in March or April. We don’t know how long this war might last. We don’t know how long oil prices are going to be elevated for, but in the short run, I think it’s fair to say that costs are going to go up. So that’s the situation where we stand for inflation. Just as a reminder, during that time, Fed raised their federal funds rate from year zero to 5.5% to tamp down inflation.
Now it’s in the high threes as of this recording. And although that has helped a little bit with mortgage rates, mortgage rates are still high during this time. We’ve seen real estate really impacted, right? We’re in this great stall. We’re in this slow period where affordability has collapsed. We see home sales stuck near 30 year lows and they might actually get worse in my opinion. I think we’re probably not in for good news there just because mortgage rates have gone up. They’re already super slow in January and February. Mortgage rates have gone up at half point. I think it’s probably going to get slower even though we’re going into the spring selling season, which is not good news. But basically much of what’s happened, the inflation situation and the real estate situation have been really closely tied together. A lot of the boom that we saw in 2020 to 2023 was because of inflation and money printing.
There was a lot of demand pull inflation. We had artificially low money making affordability. Great, that increased demand, right? That is why we saw this boom during COVID. And then when the pendulum swung back the other way to fight inflation, we had to reduce demand. That’s what raising interest rates does. It stops that demand poll inflation cycle because it costs more when people can’t afford things that lowers demand. And so we’ve seen lower demand that has slowed down inflation and it has slowed down the real estate industry with it. So then, even though we’ve come down from 9% to 3%, even though it’s working, it’s slower than we all wanted, let’s be honest. I think we wish inflation went down faster, but it is working even though it’s been required some patience. Why am I so concerned? Why are we even talking about inflation right now if it’s come down?
Well, I would say that there are three different inflationary pressures that we are seeing in the economy right now. The first is tariffs. We’ve talked about this before, but tariffs are inflationary. I know a lot of people like to argue that, but it is true. And even though the top line CPI has not gone up that much, it did go up after the tariffs were introduced. And I’ll just say this, like people say like, “Oh, inflation is down. Tariffs didn’t do anything.” If we didn’t have tariffs, inflation would be lower right now. Look at any reputable study, and you’ll just see that this is true. Study after study, all across the aisle, different political spectrums, tariffs increase inflation. And so I don’t know what it would be if we didn’t have tariffs, but that is an inflationary pressure.That’s just true. Just look at housing in particular.
If you want to look at how tariffs increase the cost of housing, I can tell you, we have seen tariffs anywhere from 10 to 45% on lumber. We’ve seen copper up to 50%. They’ve been changing a lot, so I’m just kind of giving ranges. Cabinets and vanities are up 25%. We see drywall, we see steel and aluminum prices are all up. If you look at the National Association of Home Builders, their estimate is that these tariffs have raised the cost to build a new home by $11,000. If you look at the Center for American Progress, just different methodology for doing it, they think $17,500 per home. If you look at these studies, the Center for American Progress estimated that tariffs will lead to 450,000 fewer new homes being built in just the next couple of years by 2030. And so you can’t tell me that’s not raising prices for homes.
Now, if there’s no demand, prices could come down in the short run, but what is happening is replacement costs are going up and that puts the floor for home prices even higher, even if there’s a temporary dip in prices in the short run. So that is one inflationary pressure, but that is not the only one. The second one is a labor supply squeeze, right? On one hand, I am worried about unemployment going up. So that could mitigate this issue just to call that out. But particularly in housing, 30% of construction workers are immigrants and deportation policies are creating labor pressure, which means that labor costs in construction could go up in addition to what we’re seeing from tariffs. So that is inflationary pressure. The other thing, we obviously got to call out geopolitical risks. We have seen over the last couple of years, supply shocks that have come from war.
Right now we’re talking about the oil prices in Iran, but if you looked at wheat prices when Russia invaded Ukraine, we have a very interconnected global supply chain. And if a war breaks out, a geopolitical situation emerges, whether it’s in Iran or Ukraine or in the future in Taiwan, who knows? But those kinds of things are absolutely supply shock risks for inflation. We’re seeing it right now. The price of oil has gone up 50% in the last couple of weeks. That is going to ripple through the economy. And we’re going to see some inflation. Does that mean we’re going to get to 4%, 5%? I don’t know. Probably not just from oil prices. That’s just my understanding of it. But is it going to make inflation a little bit higher? Probably. The last one I want to mention is sort of a long run structural concern, which is our rising national debt.
I’ve done entire episodes on this. It’s something I think a lot about, but basically we have rising debt in this country. It’s making up more and more of the federal budget every single year. No party has been able to even tame it. It’s just growing at a faster and faster rate over the last, I think it’s like 22 years, right? It just keeps going and getting worse. At some point, the rubber’s going to need to meet the road there and there are different ways you can do that. You can do it through austerity, basically spending less, you can do it through raising taxes, both of which seem politically impossible in the United States right now. I know one party wants to raise taxes. The other one wants to cut spending. Neither of them actually do it. That’s why otherwise you would just see the deficit get under control, but both parties have been in power over the last 22 years.
Deficit has been rising under both parties. So what’s the third option? You print your money, you print your way out of it. We have $39 trillion of debt. There is no rule that says we can’t print $39 trillion and just pay people back. Now you don’t want to do that because there is all sorts of negative consequences. You will see inflation go through the roof, bond rates will go through the roof, mortgage rates will go through the roof. It’s just not good. The value of our dollar will plummet. All of the people who lend money to the United States add good rates will no longer do that because you’re basically screwing them over. There are all sorts of reasons not to do this, but will they do it? Honestly, I don’t know. But there are a lot of people, if you listen to Ray Dalio, a lot of people think that this is a very likely scenario, and it doesn’t need to be complete.
They don’t have to print 39 trillion, but could they print a little bit more money every year? Could the Fed decide, “You know what? Rather than a 2% target, we’re going to do a 4% target so we can print some money and get rid of our debt.” That to me seems like a possible outcome. And if that happens, there is going to be long run inflation. Mortgage rates are going to be higher than they are today. We are going to see bond rates higher than they are today. And so there are all sorts of implications here. My point is that right now we have these four different inflationary pressures. We have tariffs, a labor supply squeeze, we have geopolitical risks, and we have this long-term monetization of our debt. All of these things could be happening, but they are not What demand poll sides? This is cost push inflation risk.
And I want to call out that I am not saying that inflation’s going to go to 4% or 5% or 8%. Actually, I’m going to talk through the scenarios in which I think are more probable. But the reason I am telling you this is that there is inflation risk. Again, I try and make this very clear in every episode. When I say that there is risk of something, that does not mean I’m saying it is going to happen. I’m just saying that there are some variables at play here that mean that inflation reigniting is possible. And if it does happen, it’s going to be on the cost push side, which is not as good as for real estate investors. So that’s the main point here, right? If we see inflation start to rise, it is not necessarily the type that is super great for real estate investors.
Real estate might still be a better way to hedge than other asset classes, but this is not one of those times where real estate investors say, “I don’t care about inflation because I’m benefiting in all these ways.” You probably get debt devaluation. That’s true. You probably get some tax benefits, but will rents and prices rise in an inflationary environment in the next couple of years? I don’t know. I honestly don’t think so. If I had to bet, I would say no. And so I think you need to plan your portfolio accordingly.
I want to talk through four different scenarios that can happen, and I’m going to go through them and we’ll talk about how likely each of them are. So scenario one, nothing happens. This could definitely happen. Inflation might not get that much worse. We’ve already felt a lot of the impact of tariffs. Things might not get that much worse. We’re seeing oil prices go up. I do think that will have inflation go up a little bit, but if demand stays relatively low, it might be fine. And in that case, I think what happens is we stay in the great stall. It’s the stuff that we’ve been talking about for years now. Rates hopefully start to come back down. We get a gradual restoration of affordability. These are things that we were talking about for years. And it’s the situation I felt we were in pre-Iran situation.
It’s still a likely outcome if the conflict is resolved quickly, in my opinion, and inflation doesn’t reignite. If the war ends and oil prices go back down, this is probably what’s going to happen. But we have absolutely no idea what’s going to happen in Iran. It does seem like the White House is signaling conflicting ideas, probably is a negotiating tactic, but we don’t know what’s going to go on. So although this could happen, it is only one of several likely scenarios. The second scenario is what I would call a moderate reinflation. We get CPI from three to 4%, maybe three to 5%. That’s not good. You don’t want to be there, but it’s not runaway inflation. This is kind of like just we’re just going to muck through it kind of case. How does this happen? Well, tariffs become embedded. We have seen, and I’ve read a lot of studies that show that although some of the costs have been passed along to consumers from tariffs, not all of them have yet, and that’s going to continue to drip through the economy.
So we’ll probably see, I don’t think that takes us to four or 5%, but maybe that keeps us at three or the low threes for a little while. I think the real way we get to this where we’re in a higher inflationary environment is oil. If oil prices stay high, if they stay in the 80s or 90s or 100, they were $65 a barrel. By the way, before the Iran crisis, they’re about 98 as of this recording. So up 50%. But even if they don’t go up more or even if they come down just a little bit, I do think that we are going to see … I think the chance of a recession goes up. I think we’re going to see wage growth sort of moderate. And I think rates are going to stay high. The Fed is not going to be able to lower rates as quickly as they want.
And so what happens here is I think we’re going to see downward pressure on pricing. This would raise mortgage rates. Even if inflation doesn’t get terrible, we’ll probably see mortgage rates in the six and a half to 7.5% range. Remember I said earlier this year, I thought it’d be five and a half to six and a half. Just that one point jump, I think psychologically on top of financially, but psychologically is going to be demoralizing to home buyers and investors alike. I think we’re going to see prices go down. We’re going to probably see five, six, 7% price declines. Just as a reminder, this year I predicted between negative four and 2% price appreciation. Right now we’re about flat. I think if we see inflation reignite that we’re going to lose a couple more points in terms of home prices. And I think home sales are going to slow.
No one’s going to be buying. So this is not a good scenario for real estate. And this is kind of one of the things I want to call out. I think anyone who owns real estate currently, if you go into this kind of situation, real estate, it will be a good hedge because you’ve already built some equity, you’re getting that debt devalue. You probably bought at a good price. You’ve probably locked in a good interest rate. But if we’re in this scenario, buying and acquiring new real estate’s going to be tough. Buying in a inflationary environment where prices aren’t going up, but your mortgage rate is six and a half and seven and a half percent, I wouldn’t do it. That doesn’t excite me. So I think that prices would have to really come down. You need to buy eight, 10, 12, 15% below current comps to make something work, which will still happen.
It’s definitely still going to happen, but it’s going to be a slower market. Let’s talk about scenario number three, which is this stagflationary shock. And I got to admit, maybe this is just paranoia, but I worry about this because I actually see scenario two as less likely than this because scenario two, we’re saying the CPI goes up to three to 5%, but the economy’s still going strong. I have a hard time envisioning that. I think that a stagflationary shock is maybe more likely because regardless of tariffs, regardless of inflation, I am worried about rising unemployment. It’s been going up. We all have fears about AI. A lot of parts and segments of the economy are starting to slow down. And so if you get the inflation from scenario two with the three to 5% inflation rate, I think it’s probably more likely than not that we’re going to see that with unemployment at the same time.
And that is not happening yet. But I’m just saying, if inflation goes up, I think we’re probably going to see some degree of stagflation. Now, people throw that word out a lot and panic about it. If we have three to 5% inflation and unemployment stays in the five to 6% range, that stinks. It’s not good, but it’s not like a disaster. If we see inflation go up to five to 8%, unemployment goes to five to 8%, that’s a big problem. That is where the economy really starts to suffer and the Fed really has its hands time. Stagflation, it’s just brutal. It ties their hands. There are few ways to get around the pain. And if that happens, this is where I see transaction volume really low. I think it could go down to like three million. We’re at four million now. It could possibly go that low.
Again, this is sort of the worst case stagflation scenario. Again, I’m not saying that this is going to happen, but if this scenario unfolds, we’re going to see transaction drop. We are going to see home prices drop, right? Inflation is going to erode people’s purchasing power faster than inflation. We’re going to see prices go down. We’re going to see rental vacancies go up because unemployed tenants can’t pay.This is going to be a big issue. We might even see another eviction moratorium like we saw during COVID. All of those things are going to be on the table if we see real stagflation. So let’s just all hope that this doesn’t happen. If it does though, what I would recommend is really just trying to keep liquidity, right? Just have cash reserves to cover six to 12 months, vacancy, debt service ideally. Do not take on any floating rate debt.
Please do not do that. And then be opportunistic.That is the thing. Even in these scenarios, I’m saying transaction value is down, prices are going to fall, rents are going to fall. That could be true. It also means that’s kind of what happened in 2008, right? 2009, 2010, where everyone’s like, “I should have bought back then.” So opportunities will emerge if this happens, right? Especially if people got cash, there’s going to be distressed sellers. You’re going to have a lot of people who want to sell and there’s going to be very few buyers. So buyers are going to have a lot of leverage. So that’s what I would focus on. I wouldn’t use fixed adjustable rate debt, but if you have cash or fixed rate debt, you can qualify and buy in that kind of environment. It’s a good time to reload. But I’m saying to buy that, not just as an inflation edge.
I just think that’s probably a good time to buy, but we’ll see if that actually happens. The last scenario is sort of out in the future, but I did mention this sort of long run monetization of our debt, monetary inflation. I just kind of want to mention that even though it’s not immediate term threat, I worry down the line. So I want to just explain this. How does this happen? Again, US debt continues to grow faster than GDP. Interest expenses become maybe the largest budget item that we have in our federal budget is depressing, but it might be true. Political pressure is going to increase to monetize the debt, right? Maybe I’m wrong. Maybe I’m being so pessimistic, but when I look at our Congress right now, this is both parties. I don’t see either of them meaningfully chipping away at our debt. None of them have done it for two decades.
So maybe I’ll be wrong, but I think the more likely scenarios the Fed says, “Hey, we’re going to change our inflation target to 4%. We’re going to print more money.” That means the dollar is going to lose purchasing power relative to hard assets. The bond market is going to go up. We’re going to need higher yields. That’s going to mean mortgage rates go up. And although it’s a slow moving scenario, this is one of the scenarios where I do think it makes sense to own real estate. If you are slowly devaluing the dollar, that means that that debt devaluation, that third mechanism we talked about before is going to be in full swing. The people who get killed in this debt, the monetization scenario are not borrowers, it’s lenders. This is a scenario a lender would hate. They would get crushed by this because I am paying you for 30 years with increasingly less valuable dollars.
I’m paying them that $2,000 a month, but what they can go and turn around and use that $2,000 for is much less than when it started. In this scenario, you will probably also have nominal home prices rising because there will be more demand if they’re printing more money that’s more money circulating around the economy and will increase demand. Now, I should mention that some of that might be offset because mortgage rates will go up. They will absolutely go up in this scenario. But even with that, replacement costs going up, the debt devaluation, I do think property values do rise in this scenario. So if this thing unfolds, again, it’s a long time in the future, but if we see this debt monetization thing unfold, I think it’s a good time to hold real estate. Maybe the best of these scenarios do hold real estate. So those are our four scenarios.
Remember, number one is nothing happens. We stay in the great stall. I still think this is a highly probable outcome. There is no knowing, but there is a chance that inflation doesn’t really go up. And let’s all hope, right? That’s the best outcome. Scenario two is we don’t see stagflation, but we just see inflation go up. I think that could happen, but I think scenario three is more likely where inflation goes up and we see a recession. That would probably be because we have a geopolitical situation pushing up prices outside of our control. The same time we have AI, we have a slower economy, higher input costs. We might see stagflation for a period. That’s not a great time for anyone. Real estate can help, especially for people who bought and have fixed rate debt, but buying new assets in that environment to hedge inflation may not make so much sense.
So I wouldn’t just jump into that scenario. In that scenario, I think it’s highly unlikely we see appreciation for the next couple of years. So don’t buy it, just assuming that properties are going to go up because everything else is going up. That is maybe the main thing I wanted to convey in this episode. In scenario number four, which is that long-term debt monetization, that’s a great time to buy real estate, in my opinion, especially if you can time that right when that’s just starting and it happens for 10, 15 years while the value of your mortgage payments that you’re paying out are going down, that is a great way to hedge inflation. It’s also a great way to earn a return in an inflationary period. So that’s it. I know it’s a long episode. There’s a lot to talk about. I really wanted to make sure everyone understands this because I see these people on social media right now.
The war in Iran’s going to increase inflation. You should buy real estate. Maybe, but there is more nuance to it. It is not that simple. And so I hopefully you can all understand it. Just a couple takeaways. Real estate is a proven long run inflation hedge. Absolutely. Huge correlation between home prices and the CPI over the last 45 years, but it works really differently. The hedge works differently depending on the type of inflation. Demand pull is good, right? Cost push is mixed. Stagflation is bad.That’s the takeaway. Demand pull inflation, that’s like what we would see with the debt monetization. It’s going to be good for real estate. Cost push, you’ll have a mixed bag. Stagflation is bad. And the current environment, what we’re risking right now is cost push. And that means that we could also have cost push plus rising unemployment, which is stagflation.
So that’s my fear. That is the thing I want you all to remember is that if we see inflation in the near term, it’s probably not the good time. If we see it in five years or 10 years because we’re monetizing our debt, it’s bad for our society. I’m not happy about that, but if you want to hedge against that, real estate is an excellent way to hedge against that. Just some parting thoughts though, no matter what happens, like I think the things that work regardless are number one, fixed rate debt. I kept saying this again, but fixed rate debt is an excellent inflation hedge in all environments. So I really like it. There are times that I’ve used adjustable rate, but for most things, fixed rate debt. Invest in supply constrained markets that protects values no matter what is going on with inflation and keep high liquidity reserves.
It’s the number one thing. It determines who survives during a stagflationary event, who survives during bad times, and gets to see the good type of inflation. That’s what we’re talking about. How do you survive the bad inflation to get the good inflation? Again, not saying we’re necessarily going to have it, but I want you guys to start thinking about this as you build your portfolio strategy. If we start to see inflation, diagnose it. Is it the kind that real estate can help you hedge or not? And you need to make your portfolio decisions based on that analysis. Of course, I will be letting you know if you listen to this podcast, I will update you if inflation goes up, what kind it is and how it will likely impact real estate, but hopefully this episode will help you make some of this analysis for yourself and protect yourself against any potential inflation in the future.
That’s it for today’s episode of On The Market. I’m Dave Meyer. Thank you so much for listening. We’ll see you next time.