How Inflation Impacts Your Home Buying Journey

Everyone is experiencing the pinch of inflation right now. The U.S. inflation rate is at a 40-year high of 7.5%, as of January 2022. Most consumers across the country have already felt the impact of higher costs in their weekly grocery trips, when buying household essentials, or when filling up their gas tanks.

All of this talk about rising costs for consumers can feel overwhelming. For those in the market for a new home, it can also leave you wondering how this is impacting that part of our economy.

Some inflation is not a bad thing for buyers and current homeowners. As home values rise, the investment you’ve made in your home increases, too. And because different factors in the industry are interconnected, it takes a lot to rock the housing market.

Let’s dig deeper into understanding all the ways inflation can affect your home buying process.

Home Appreciation: Real Estate Values Usually Rise in Line with Inflation

We’ve all heard that a home is one of the best investments you can make. That saying comes from how the value of your home will likely rise over the time that you own it.

When you factor in normal inflation, or the higher-than-normal inflation we’re experiencing right now, this financial aspect of homeownership is positively affected. As inflation climbs for everyday items you’re purchasing, it also drives up home prices. That means more equity for you if you’re already a homeowner.

On the flip side, if you’re looking to purchase a home during a period of high inflation, it can be worrisome. Most experts agree that if the fundamentals of the economy and the housing market are steady, home values will continue on a steady trajectory. While you probably won’t experience rapid growth in your equity position like current homeowners, it’s still a reliable long-term investment.

Home Prices: Supply and Demand Still Play the Largest Role in Valuation

During a housing market like today’s, buyers often mention a concern that they will buy high and be forced to sell lower, meaning they would lose money on their home. Regardless of market conditions, supply and demand always play the largest role in pricing.

That means that it’s possible even in a period of high inflation that current homeowners could flood the market with too much supply as they seek to capitalize on high selling prices. That scenario would drive prices down, with too many houses on the market and not enough buyers.

We’re not in a situation where there’s too much inventory, but that what-if scenario illustrates how supply and demand overtake inflation as a market factor.

Interest Rates: Rising Rates Can Counteract Inflation

Another piece to understanding the housing market puzzle is interest rates. Rates interact with inflation, supply, and demand as separate forces pulling the market in different directions. These varying influences usually result in an overall steadiness.

Interest rates usually follow inflation, meaning they increase in line with it. Specific to the housing market, rate increases typically push demand down, as fewer new buyers enter the market.

Rates are currently increasing incrementally, and the result so far has been a status quo. Housing supply is still suppressed, and demand is steady.

Drastic Inflation Doesn’t Go on Forever

With an understanding of the major forces at play in the housing market, you might still have some questions about continued inflation. Sure, things are steady now, but what if uncontrolled inflation continues?

It’s important to remember that we can’t predict every scenario, and it doesn’t pay to pine over all of the what-ifs because many of them will never happen. What we do know is that businesses and governments have highly vested interests in ensuring continued high inflation doesn’t go unchecked.

Rampant inflation would have crippling effects across the entire economy and hinder international trade. It’s not an outcome any country wants nor is working towards. Historically, inflation always returns to a nominal, normal rate. None of us can predict inflation with certainty, but we can be relatively certain it will fall back into line.

Navigating the home buying process can be challenging enough without adding in the effects on inflation. Working with an expert loan officer will take that weight and stress off your shoulders. Our loan officers are always up-to-date with the latest market changes because they’re dealing with them daily. Connect with our team for a free consultation today, wherever you are in your home buying journey.