How Does Inflation Impact Home Prices?

posted in: Mortgage News 0

home prices

Because of inflation, prices for goods and services are on the rise. Countless countries are experiencing the effects of inflation. But why has the world been experiencing high inflation rates?

The consumer demand for goods, supply chain disruptions, the Russia-Ukraine war, and the COVID-19 pandemic are all reasons why prices are increasing.

This especially affects the United States, with inflation reaching 8.5%in March 2022. This is at an all-time high; the highest inflation has been since 1981.

Inflation rates in the U.S. affect more than goods and services— it also affects home prices. Here’s the impact of inflation on house costs and what that means for buyers and sellers.

Is Inflation Bad in Real Estate?

Inflation has many negative effects on the real estate market. The main issue is rising interest rates. The Federal Reserve increases interest rates when inflation is high in an attempt to bring down prices.

This causes fewer people to borrow more money. Not only will fewer people take out a mortgage but not as many people will use credit cards for purchases, take out a home loan, and more. Plus, lenders usually tighten borrowing standards.

With fewer homebuyers, sellers will price down their homes, so they make less on the home sale.

However, inflation can be good in some cases. If a homebuyer is in good financial standing and has an excellent credit score, they can still get a good mortgage. Plus, they can score a cheaper home.

Supply and Demand

Many factors impact home prices. While inflation is one of them, it’s not the only reason home prices are high. Supply and demand are among the biggest factors in the inflated economy, specifically with home prices.

In short, a low supply of homes will drive the prices up. A large supply of homes will drive prices down. Not only that, but a low home supply will cause bidding wars, so buyers pay even more than the selling price.

In recent examples, 2021 and 2022 welcomed a red hot real estate market, with home prices soaring over 18%. Not only that, but 70% of home sales saw a bidding war.

Why has there been a home price increase and low home supply? With low-interest rates, homebuyers flocked to purchase a new home. This created lots of competition in the market.

More people also started working from home, meaning they could live and work anywhere. This caused people from northern states to move to sunny states. Florida, in particular, experienced 19% more home sales in 2021 than in 2020.

Fewer people will buy homes. Demand will decrease, and home prices will drop. However, with rising inflation, mortgage rates are also increasing.

Home Value Increases

While rising inflation rates will mean increased mortgage interest for buyers, inflation is a very good thing for sellers. That’s because the price of their home will increase.

In addition, if a seller decides to stay in their home, the price they pay for their home won’t increase. That’s because they already locked in their mortgage and interest rate, especially if you took out a fixed-rate mortgage.

Economic Strength

Even if inflation increases, it’s not the end of the world for potential home buyers. Inflation will inevitably decrease (as we will cover later).

But as long as a country has a strong economy, the currency will prosper, people will continue working, and the real estate market will stay afloat. And fortunately for Americans, the U.S. is still the richest country in the world.

While inflation still impacts housing costs, a strong economy can make up for it. For example, wages can increase in stronger economies so that people can afford the higher cost of living.

This doesn’t always mean that people will still buy a home when inflation rates are high. Potential homebuyers may wait for home prices to decrease. This brings us to our next point.

Inflation Is Unpredictable

An important fact that all home buyers and sellers need to know is inflation is unpredictable.

Inflation in 2022 is high now, and it’s predicted these high prices will linger. With that being said, the Federal Reserve is trying to control those prices. They do this by raising interest rates. And now the pandemic is waning, we’re predicting the issues that persisted will resolve.

While economists predict home prices will continue rising, others predict that home prices will start to fall. However, home prices will only start to fall in certain cities.

As stated previously, the pandemic caused an exodus of remote commuters moving to different cities. We see this in people from wealthy states such as California and New York, where they started investing in homes in more affordable areas.

This caused massive spikes of overvaluing in the real estate market, which affects the local communities.

The cities most affected include Boise, Charlotte, and Phoenix. These cities and similar may expect to see a home price decline, though it’s still unpredictable. These cities can’t face overvaluing forever, since the high prices will affect future real estate growth.

Inflation Will Decrease

What comes up must come down, and that saying rings true with inflation. If inflation is too high, it starts to harm the economy. Life for Americans becomes tougher, and inflation also impacts the strength of the dollar.

Inflation is, unfortunately, a part of life. But historically, inflation has never lasted forever.

It’s inevitable that inflation will decrease at some point, but it’s impossible to predict when that will happen and how. Economists do predict that inflation will ease throughout 2022 but will ease slowly.

Why inflation will decrease is another question. The Federal Reserve is taking aggressive actions by increasing interest rates. Once supply and demand balance out, inflation rates will also drop.

How will decreased inflation affect the housing market? Since more Americans will be in better financial health, there will be more home buyers again.

However, this isn’t a bad thing. With more affordable goods and services, home construction becomes cheaper. There will be an influx of new homes attracting both homeowners and investors. Plus, the homes will be priced more affordably.

Get a Good Mortgage to Combat Rising Home Prices

With increasing home prices, the key is finding a good mortgage— especially with mortgage rates decreasing. But which mortgage is right for you?Read our blog and find out more.

At 7th Level Mortgage, we are an experienced team of mortgage professionals based out of New Jersey and serving the east coast from Pennsylvania to Florida, including Delaware and Maryland. We have won numerous awards for our excellent professional work and reputation with clients for being extremely diligent, accessible, and hands-on throughout the entire mortgage process.