Effects of Inflation on Housing Prices

January 11, 2022

In most economies, inflation is a common phenomenon and is often considered an early sign of the end of an economic cycle. A sudden spike in inflation can impact everything from the price of a gallon of gas to a jumbo pack of toilet paper. However, if you’re in the home buying market, the impact is even more significant. 

To help you make an informed decision in the current housing market, our experts look at the effects of inflation on home prices. 

What is inflation?

First, it’s important to understand what inflation actually means. Inflation is the rate of increase in prices for a set of products or services over a designated period, usually a year. 

In theory, healthy economies should always have some level of inflation. When prices gradually increase, it encourages consumers to buy products and services – including homes – now, rather than waiting due to a greater potential increase in the future. Minimal inflation means there’s work for producers of products and services, which in turn allows workers to purchase services of their own. 

The key is curbing inflation. According to the U.S. Bureau of Labor Statistics, consumer prices have increased by 6.2% as of October 2021, over triple the Federal Reserve’s annual inflation target of 2%. Basically, the purchasing power of each dollar earned is reduced because prices are rising.

Inflation’s Impact on Home Prices

According to Zillow, the value of a single-family home in the United States has increased by 90%; in 2022, forecasters believe prices will increase an additional 13%. There are several reasons why the housing market is affected by inflation:

  • Increased Property Values. As with any other consumer product, home prices rise with inflation. The increase is primarily due to the rise in building material cost, which the builder usually passes to the consumer. A recent report by the National Association of Home Builders (NAHB) found that building material prices have increased nearly 20% in the past year. Since the cost of materials is higher, developers spend more when building new homes, increasing the price of new real estate properties. Additionally, existing homes will also rise in value due to the reduced supply of new construction.
  • Rising Interest Rates. As inflation rises, so do mortgage interest rates. For any investor (including your mortgage lender), the goal is to earn more from the investment than initially invested. For that to happen, the investment has to earn at least more than the inflation rate. Again, the cost increases are passed on to the homebuyer, making money more expensive to borrow. These economic circumstances could lead to fewer buyers financing, making larger down payments to help reduce the monthly mortgage payment, or not even purchasing a home at all.
  • Soaring Rental Rates. One of the most noticeable effects of inflation is increased rental rates. Why? Instead of taking on an unmanageable mortgage, many people will choose to rent rather than buy. In addition, rental property owners may be inclined to raise monthly rents due to the high demand for rentals and influx of available tenants, putting landlords in a lucrative position in this economy. 

Trust Pacor Mortgage

If you’re ready to buy or refinance a home, now is the time to make your move before inflation causes mortgage rates and home prices to rise. The experienced professionals at  Pacor Mortgage can answer your questions and help you take advantage of today’s great mortgage rates. Call us today at 773-881-7744 to set up an appointment, or visit our website to learn more about our products and programs.