Inflation’s Impact on Housing Market

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How will inflation affect the housing market?

Housing prices tend to rise with inflation. This is because the economy is dynamic and there are a lot of changes introduced to it every day. One of the major factors causing home prices to increase is interest rates.[1] When interest rates are low, buying homes can be more affordable and the demand for homes increases. However, if the supply of homes remains constant and the demand increases, then the prices of homes will increase. In larger cities, where land availability is limited, you can see a more pronounced effect of inflation. Housing is generally viewed as a good asset when it comes to inflation, partly because the home’s value will rise with the inflation rate, and partly because it is a leveraged asset.[2]

Should I sell my house during inflation?

For several reasons, inflation can be a good thing for homeowners. The most obvious benefit is the fact that the value of your home rises with the inflation rate. With supply low and demand high, sellers can increase asking prices when they go to sell their homes. And in many cases, sellers may receive offers above the asking price. This makes it a great time to sell, but a much more difficult time to buy.[3]

To better understand how your house will be priced with inflation, it’s important to look at the Case-Shiller Index, which is an economic indicator that tracks the monthly change in the value of single-family U.S. homes. The rapid pace of price appreciation according to the index indicates that demand is still heavily outweighing supply, and that we are still in a seller’s market.[4]

Should I buy a home during inflation?

Not surprisingly, the circumstances for positive investors in an inflationary market are very different from those for existing owners. With that in mind, the most important factor you must consider when buying a home is timing.

How long do you plan to own the property? If you’re in it for the long haul, you may expect the same value increases that existing owners are experiencing. If you’re looking for a shorter investment time, there could be certain dangers, such as risk of getting caught in a real estate bubble. New homebuyers should expect closing costs to run as high as 6 percent of the home price, and if you do not have enough equity to absorb those costs, you may find yourself at risk of losing money when the bubble bursts. Housing prices have seen historic rises over such a short period of time, and while that might not be inherently concerning, it highlights the importance of understanding your expected investment timeline and adjusting your plans accordingly.[3]

Can inflation cause a housing market crash?

As many signs indicate the housing market is on a fast-paced upward trajectory, many are wondering: Will the housing market crash or at least deflate at any point in the near future? Although a sharp increase in home prices, shifts in disposable income, supply disruptions and rising labor costs all indicate that we are heading into a housing bubble, most housing experts are predicting the housing market will probably stay hot. Some of the numerous reasons the housing experts are claiming this are that supply can’t keep up with demand, millennial demand for housing is up and borrowers are less likely to default on their mortgages.[5]

Sources:

[1] “The Effect of Inflation on Housing Prices,” homeguides.sfgate.com/effect-inflation-housing-prices-2161.html (accessed July 13, 2021).

[2] “Is There a Correlation Between Inflation and Home Prices?” investopedia.com/ask/answers/correlation-inflation-houses.asp (accessed May 31, 2022).

[3] “Here’s how inflation could affect your next real estate move,” washingtonpost.com/business/2022/01/04/heres-how-inflation-could-affect-your-next-real-estate-move (accessed January 4, 2022).

[4] “Instant Reaction: S&P CoreLogic Case Shiller Home Price Index Accelerates to 19.8% in February 2022,” nar.realtor/blogs/economists-outlook/instant-reaction-sp-corelogic-case-shiller-home-price-index-accelerates-to-19-8-in-february-2022 (accessed April 26, 2022).

[5] “Will the Housing Market Crash? Experts Give 5-Year Predictions,” forbes.com/advisor/mortgages/real-estate/will-housing-market-crash (accessed July 10, 2022).

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