The housing market is not immune from outside economic forces, including inflation. In shaping the dynamics of the housing market, inflation plays a vital role; it affects real estate prices, affordability, buyers’ choices, and policy responses. Whether you are a homeowner or a potential buyer, understanding the core effects of inflation can help you apprehend what decisions to make and how to equip yourself to reduce the adverse consequences of rising inflation.
How The Rate Of Inflation Changed From 2020 To 2023
Source: weforum.org, statista.com and bls.gov
Real estate is viewed as a hedge against inflation. When inflation rises, costs are higher for goods. The housing market is not any different from that. Generally, when price rises across the economy, housing prices also rise.
Areas with strong job growth and high demand for residence experience more pronounced price hikes in response to inflation. Conversely, locations with oversupply or weak economies may grieve modest inflationary effects. Housing investors tend to allocate more capital to assets seeking to preserve wealth and generate returns that outpace inflation. The increased investment activity can contribute to higher demand for homes and upward pressure on prices.
The Effects of Inflation on The Housing Market
Driven Up Mortgage Rates
Inflation has direct contact with the bond market where mortgage rates are determined. High rates shorten the demand for mortgage-backed securities translating into low bond prices and high mortgage rates. Inflation erodes the purchasing power of money over time, causing lenders to demand higher interest rates to compensate for the diminishing value.
It deters potential buyers from entering the market as well as prompts existing homeowners to be able to refinance their mortgages to lock in lower rates before further rises. For buyers, higher mortgage rates not only increase their borrowing costs but raise monthly payments on their loans that they need to run for a long period of time.
Personal finance author, Dan Rafter predicts that mortgage rates will continue to rise. The impact of inflation is felt by all people around the country. The US economy enters an inflation period when prices of goods and other day-to-day expenses are at a peak. To recede the stress to some degree, homeowners should prepare themselves for situations by opting for fixed-rate mortgages, paying off debt, etc., says Daniel Belcher, founder at Oklahoma City-based Mortgage Relief.
Effect on Home Prices
The increase in home prices is one of the most immediate effects of inflation on the housing market. The cost of construction materials, labor, and land acquisition for new projects escalates with the general price level rises, which leads to higher property prices, making it challenging for prospective buyers to afford homeownership. It is even more demanding for first-time buyers or those with limited financial resources to buy a home that is overpriced.
This trend is particularly evident in popular coastal areas where the allure of seaside living drives the market and contributes to price appreciation. Ron Wysocarski, a real estate market specialist and CEO of Wyse Home Team Realty, marked that home sellers are enchanted by the high prices while enjoying speedy sales. Housing market analysts enunciate that home prices in Maui and Carmel-by-the-Sea trended up 10.4% and about 34% respectively year-over-year, adequately reinforced by an increase in anticipated inflation.
Price Hike In Rental Markets
The impact of inflation on rentals underscores the interconnectedness of economic factors and housing affordability. Rising inflation has an impact on rental markets, followed by high costs of property maintenance, taxes, and utilities.
It adds additional pressure on homeowners to cover the increasing expenses. What many landlords try is that they adjust the rental prices upward to offset these property-related costs, which strain the budgets of renters. For residents who rely on rental accommodation, it might be difficult to secure affordable and stable housing.
Over the couple of past years, renting homes has become more expensive than ever, especially since the dawn of the pandemic period. 2022 Harvard study finds that half of home renters in the US spend 30% or more of their income on housing, meaning those households are moderately rent-burdened.
Rents were unaffordable in the same year, a historic high, for more than twenty-two million tenants. Median rent prices in 2024 climbed 3.7% in the Midwest and 1.7% in the Northeast. Since inflationary pressures persist in affecting rental costs, housing experts hope for policymakers and local stakeholders to consider strategies to address rental soundness, ensuring that all residents have access to safe, decent, and affordable housing options undeterred by economic fluctuations.
Top Five Cities With Annual Rent Increases, 2024
|
Providence, Rhode Island |
8.1% |
|
Cleveland, Ohio |
6.9% |
|
Louisville, Kentucky |
6.7% |
|
Hartford, Connecticut |
6.4% |
|
Cincinnati, Ohio |
6.4% |
Influence On Home Supply Dynamics
Inflation influences housing supply in the real estate market. With higher costs of land acquisition and building materials, construction activities slow down. Builders often scale back on new developments and delay the start of projects to mitigate rising expenses. This can exacerbate existing deficiency and affordability challenges in many markets. Home builders, for instance, are still dealing with a shortage of construction materials that is increasing prices, making new homes more expensive.
Inflation causes regulatory hurdles that increase compliance costs for housing builders. Stricter building codes, environmental regulations, and permitting requirements can add to the time and expense that impede the pace of new residential construction and limit the supply of housing in the market.
The result of inflation can direct the decisions of different stakeholders in real estate. Given today’s market, understanding the implications of inflation on housing is crucial for both home buyers and sellers; Where inflation may reduce buyers’ purchasing power, opportunity, and housing options, for a seller, inflation can render dampened demand and fewer real estate customers. If you are in the market, you are empowered to try sooner facing fewer effects of inflation to ensure long-term financial well-being.
