What to Know About Housing Prices and Inflation

We’ve all heard the news: inflation and housing prices are skyrocketing. So people are asking: how is this all connected? Is this good for sellers or buyers when it comes to real estate? Here’s a quick explanation.

Are Inflation and Housing Prices Connected?

Increased inflation causes housing prices to increase as well. There are lots of reasons why inflation is rising, but the short answer is that the economy has bounced back following the pandemic shutdown and prices have shot up with it. Inflation is also leading to higher wages for many who were already able to save during the last two years. What are people doing with all this extra cash? Buying houses.

Inflation isn’t the only reason for the housing market boom. Buyers also want to take advantage of historically-low interest rates that the Federal Reserve slashed to boost the economy during the pandemic. The lower the interest rates, the cheaper it is to borrow money, so buyers are running to lock in those great rates before the Fed raises them as many as seven times in 2022. The pandemic also caused higher construction costs, labor shortages, and supply chain issues across the country. Housing supply couldn’t keep up with demand, raising prices even more. All of these factors combine to create a perfect storm of high housing prices. Depending on where you are in the market, the storm could be a blessing or a curse. 

Is This Good or Bad for You?

It depends. In a market with high housing prices and high inflation, homeowners are in luck. Historically, housing is a hedge against inflation. If you have a fixed-rate mortgage, you’ve locked in the amount you pay every month for the life of the loan. As inflation, wages, and the price of your home rise, each dollar you put into your mortgage has more value. If you’re looking to sell your home in a low-supply (seller’s) market, you can set a huge asking price and still have buyers in a bidding war for your home, increasing the price even more.

Buying in this type of market is trickier. Timing is everything, and no one knows the exact timing of anything. If you buy now, you may overpay for a house simply because of a lack of options. Despite the higher costs, there is still a big incentive to buy quickly because interest rates are still incredibly low. If you wait to buy, prices could keep getting higher, pricing you out of the market. But as inflation keeps rising, the Federal Reserve will inevitably increase interest rates. This will make it more expensive to borrow money for your home, but also drive down home prices. 

We know this can all be confusing, but buying or selling a home is often the largest financial transaction in a person’s life, so it’s important to do it right! Talk with a real estate professional about what’s best for you, and we’ll be here to help you close the deal.

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