Inflation is a hot topic right now, and for good reason: in October, the annual inflation rate reached an alarming 6.2%. This is the highest level since November 1990, over 30 years ago, and a big increase from the manageable 2% we have seen in the last five years.
Translated into your daily life, this means Americans spend more money on roughly allfrom gas for your tank to heating bills to groceries and more. Our money just doesn’t go as far as it used to.
So what is the impact of inflation on housing?
It is not surprising that inflation also has a huge influence on the real estate market. Residential real estate has always been an âinvestment havenâ during times of inflation, according to a Stanford University study. Researchers found that during the 1970s (another time of soaring inflation), house prices rose relative to the size of the economy. This was good news for homeowners and real estate investors, as it meant the rising value of their home was helping to offset rising prices elsewhere.
However, if you were shopping for a new home, that was a major challenge, and so it may be today.
What is inflation and what are the causes?
Simply put, inflation occurs when the prices of goods and services rise, thereby decreasing the purchasing power of the money you have to spend. Currently, several factors are contributing to inflation. First, consider the impact of government assistance during the COVID-19 pandemic.
âWhile the government supported American households and provided [financial assistance], this gave a lot of people more purchasing power â, explains George ratiu, head of economic research at Realtor.comÂ®. âBut a lot of Americans could work remotely and didn’t need to spend, for example, on packed lunches at the office, travel and parking, dry cleaning and other expenses. Firms on the supply side of these goods and services therefore had to charge more because they had fewer customers. “
As the number of transactions declined, business owners raised their prices to stay afloat and make ends meet. (This often happens during a recession.)
Another factor contributing to inflation today: supply chain issues that are occurring around the world. Manufacturing has been disrupted due to the pandemic, as disease and lockdowns have slowed operations, and there continue to be significant issues with the entry of goods into ports. (The Los Angeles / Long Beach area is one of the often-cited bottlenecks, with so many products typically arriving there from Asia.) Trucking these items across America once they arrive has also been a challenge as there are fewer people available to drive the 16 wheels to get the goods where they need to go.
âThere is a labor shortage. Companies are raising wages to remedy this, but also raising prices accordingly, âsays Laurent Yun, Chief Economist at the National Association of RealtorsÂ®. So while a bathroom sink can normally sell for $ 100, when you have to pay your workers and drivers more, the manufacturer has to raise the prices to make up for that.
How Does Inflation Affect Home Prices?
Now that you understand why the prices are painfully high, let’s take a look at how this affects home prices. Even before inflation started to rise, the housing market was tight, with prices and rents soaring. Brace yourself, because things aren’t going in a more affordable direction any time soon.
“Inflation exacerbates the imbalance between supply and demand for housing, which means even higher prices for housing,” explains Laurent J. Blanc, Robert Kavesh Professor of Economics at the Leonard N. Stern School of Business at New York University. âPeople think, ‘I need inflation coverage, housing has always been a durable, long-lived asset. “”
The more people enter the housing market, the higher the demand, the lower the supply and the higher the prices. The air is already thin on that front, with median home sales and rents hitting record highs this year, Ratiu says.
White also says there is a serious zoning construction issue across much of the United States, making the market even more difficult for people looking to buy and rent.
“Land use restrictions, whether it be the size of land on which a single-family home can be built or a multi-family rental or condominium property, further limit the offer.” , White explains.
What does inflation mean for buyers and sellers?
There is no doubt that high inflation will affect the budgets of home buyers. The majority of buyers tend to finance the purchase of a home, which means they need a down payment and then need to apply for a mortgage.
âAssuming they have a down payment, the mortgage payment will be a big factor in what they can afford,â says Ratiu. âMortgage rates tend to move in parallel with inflation, so mortgage rates will rise. The Fed has been a major buyer of mortgage-backed securities, but that will end by April 2022, pushing rates up. At the end of November, Freddie Mac’s rates rose to 3.10%, which means buyers of a mid-priced home will spend an additional $ 160 per month on their mortgage payment, which is a noticeable impact. “
For home sellers, the current tight market can be a good time to turn a profit – provided with the aftermarket they can find an affordable place to relocate. If the house you bought for $ 200,000 is now worth $ 300,000, that’s great. But if you are selling and want to stay in the area, can you afford to buy what you want, or has inflation decimated your purchasing power? This is an important question to ask.
How long will inflation last?
As inflation eats away at the purchasing power of homebuyers, many may be wondering: When will things get better?
âMy prediction would be that most places will see house prices rise as we resolve supply chain issues,â White said. âWe also come to terms with consumer trends that go back 50 years. People had gone from spending on goods to spending on experiences – going to the gym, dining out, going on a cruise. COVID-19 has totally reversed that. Who wants to go to a restaurant or to the movies during a pandemic?
âBut if things change and we spend more on services, that will help unravel the supply chain issues,â White said. âThere will be less demand for goods in bottleneck ports. “
Once that happens, inflation is expected to subside and allow homebuyers to get back to their pre-pandemic budgets.
The other big question that will affect the real estate market is where mortgage interest rates will go next. Much depends on the actions taken by the Federal Reserve.
âThe 30-year mortgage rate could rise to 3.7% by the end of next year, from the current 3%,â Yun said. As a result, some buyers will no longer be eligible for higher interest rate mortgages. They will either have to cut their spending a notch or sit on the sidelines for a while as the market gets too expensive. For homebuyers with cash on hand, this will be a good time to get into the market as they seek to hedge against inflation during this time when money isn’t going as far as it once did. .
While inflation will favor home sellers and short-term investors, the hope is that after 2022 inflation will be brought under control. Then the tide would turn in favor of home buyers, making it easier to buy a home in the New Year.