I was out with a friend this week on Squam Lake, and we were talking about the effect of inflation on housing prices in the Lakes Region. All of us know that inflation is spiraling. The Government reported in June that inflation registered at 9.1%, the highest recorded since 1981. Wow, that’s 41 years ago, and I remember that year vividly. Interest rates were at record highs, and the real estate market was in turmoil. Between 1978 and 1981, existing home sales fell by 50% nationally, from 3.99 million homes in 1978 to 1.99 million homes in 1981. It took almost two decades, or until 1996 before home sales exceeded the 1978 level of 3.99 million units nationally.
If rising inflation worries you about the housing market, you are not alone. Generally speaking, owning a primary or second home is looked upon as a good asset when we go through periods of inflation. The main reason is because a home’s value will usually rise with the inflation rate. Part of the reason is that the home is a leveraged asset with a mortgage in place in most instances. If you have a reasonable fixed interest rate that does not change, the leveraged aspect of the investment will increase over a long period of time. So, if you’re putting down a 20% down payment, for example, the increase in value is based on the home’s value, not the down payment made. When you apply an inflation rate of 8.5% as of July 2022, you generally are ahead of the game if your fixed rate mortgage is at 5.47% (today’s average rate for a 30-year fixed rate mortgage.) The reason is because you would be making a payment in inflation-adjusted dollars. In other words, you are paying less for the loan than when you started the loan because inflation has boosted your return.
Inflation, however, can negatively affect housing prices if interest rates make the asset too expensive to borrow. As a result, fewer buyers will commit to borrowing mainly because of high rates, which can ultimately depress housing prices. We are not at that state like we were in 1981 when variable interest rates were around 17% for a 30-year mortgage in the Lakes Region. Yes, the current rate of 5.47% will likely increase as we head towards the new year; however, over the last 30 years, the average has been over 7%. So even today’s rates hovering around 5-5.75% are still a good deal by comparison.
The big picture
Yes, we do have real estate cycles that go up and down like the tides in the ocean. That’s what my friend and I talked about on Squam Lake this week. Both of us were blown away when we talked about a few examples of properties we sold back in the day and what they are worth today. Over time inflation always wins, and over the long-term, values will increase.
Examples we talked about
- In 1977 on Big Squam Lake, I sold the West Wind Resort. The property included 8 acres with 426′ of shorefront, sandy beach, docking for 15 boats, 21 large housekeeping cottages, and a lovely owner’s residence for $209,500!
In August 2020, just one of the 21 cottages not even on the water sold for $650,000, and in June 2018, Roche Realty Group sold the same cottage for $467,000 (an increase of $200,000 in just two years)
In September 2022, a 0.61-acre island property on Ithaka Island with a 1,102 square foot cottage built in 1910, a gazebo, and a boathouse slip on the Squam Channel sold for $3,225,000! This is an excellent example of what inflation does to real estate.
- Around 1980, I sold the original parcel of land to the developer of Samoset Condominiums on Lake Winnipesaukee in Gilford. The property included 850′ of shorefront with 22 acres and spectacular views. The purchase price was $250,000.
130 individual townhouses were built on the site. In the last 2 years alone, there have been 24 resales of the individual townhouses, with the average price at $577,311. The highest sales price was $829,000! How’s that for inflation?
- In 1979 I sold Edwards on Wentworth Resort in Wolfeboro for only $500,000. The parcel included 50 acres with approximately 1 mile of shorefront on Lake Wentworth, Crescent Lake, and the Smith River. It included a colonial Inn, a scenic barn, a multitude of nice cottages, and a beautiful sandy beach.
The development turned it into a 44-lot subdivision with cottages, and today the individual lakefront homes sell in the $1,000,000+ range each…another example of inflation.
- In 1980, I sold the Chanticleer Motor Inn and Cottages on Lake Winnipesaukee in Gilford to the developer of Broadview Condominiums for $500,000. The property included 640′ of shorefront on 10 acres with a 32 slip rock cribbed marina, an inn, and multiple cottages.
50 townhouses with attached garages were constructed on the site. In 2021 one of the 50 units on the upper level sold for $655,000, and a waterfront unit would sell for much more today.
- In 1976, I sold Lakeport Landing Marina for $428,000. It included 600′ of waterfront, 154 covered and uncovered slips, 55,000 square feet of storage buildings, a storeroom, gas docks, a repair shop, and a towner’s residence. Today the marina is worth well up in the high millions. Inflation does its thing.
- In 1978, I sold Whispering Pines Resort on Lake Winnipesaukee for $195,000 with 550′ of shorefront, 10 cottages, and a house. Ledgecroft Resort for $200,000 and the White Oak Motel for $188,000. In 2021 just one seasonal cottage out of 11 at Whispering Pines sold for $404,000.
- In 1984, I sold 75 boat slips at Bayshore Yacht Club in Meredith on Lake Winnipesaukee that I converted to condos for the owner. They all sold in 3 weeks in the range of $8,000-$15,000 for a covered slip. Boat slip #13 Sold in 2021 for $179,900. A nice increase due to inflation.
So, using just a few examples above, you can see how inflation impacts property values. It only adds fuel to the fire, causing prices and mortgage rates to rise further, a double whammy where consumers’ dollars have less buying power and loans get more expensive. During my career, the trajectory has always been up, and you will see the normal cycles where prices correct, just like the stock market, and timing is critical. However, in the long run, with rising inflation, it only means that cash now holds more value than it will in the future, assuming inflation continues to rise.
This article was written by Frank Roche. Frank is president of Roche Realty Group with offices in Meredith and Laconia, NH, and can be reached at (603) 279-7046. Please feel free to visit www.rocherealty.com to learn more about the Lakes Region and its real estate market.
