How Inflation if Affecting Home Prices

United States Inflation

Changes in Consumer Purchasing Power

The real estate market is shifting due to the way the economy is. Currently, inflation is relatively high in many countries, including the United States. In an effort to counteract inflation, the Fed has started a program to systemically increase interest rates throughout the next few years as a way to stem the rise of inflation.

This will affect not just the real estate market but also the cost of goods that we buy on a daily basis. Understanding that this is only a short-term method to bring back a healthier and more stable economy is critical when it comes to knowing when to buy a home or if it’s better to wait down the line.

How inflation affects home prices

Currently, inflation is at 8.5% in the US. Combine that with low rates, and we have low-cost money and overinflated goods. Items such as groceries and clothing are directly affected, and you may have already noticed how the same amount of money this March buys you a lot less than just a year ago.

The same goes for the price of homes and is also one of the main reasons why homes seem to be at such high price points recently. It may appear that it’s expensive to purchase a home now due to this, but keep in mind there’s a balance between the purchase price of a home and the interest rate on your mortgage.

What do rising rates mean?

The Fed has been raising interest rates by 0.25% and will have an additional estimated six hikes throughout 2022. Higher interest rates will reduce purchasing power because it’ll make the cost they can borrow much more expensive. A quarter of a percentage point may seem small.

Still, when it’s going to raise a couple of percentage points on the price of money, several hundred-thousand-dollar mortgages will significantly shift the monthly payment. This means fewer qualified buyers will be available, and home will stay on the market longer, lowering the price of homes in the cooling economy.

Let’s take a standard example of a home that has a price of $300,000. We put down a conventional 20% down payment on it, making our mortgage $240,000 at a 2.9% interest rate for 30 years. So, the monthly principal and interest payment alone will be just under $1,000.

Our other example will have the same parameters, but the interest rate comes out to 4.9% after all the rate hikes. This gives a monthly mortgage payment of $1273.74, nearly $300 more per month, and that’s primarily just additional interest. Over 30 years, that comes out to an additional $100,000 in interest paid.

In the end

That’s why it’s essential to consider your options, and if they are towards the long term, it might be a good idea, if you were already in the buying phase, to lock in those rates today and start working towards increasing your home equity.

Otherwise, the longer one waits in this economic situation, the less they’ll be able to purchase and the more they’ll pay in interest over the long term.

If you are considering selling or buying in the next 12 months, please reach out to me directly, so I can keep you looped in on the every changing, fast moving market conditions.