HOW DOES INFLATION AFFECT HOME PRICES

If you’ve followed the news lately, you’ve probably seen quite a bit about inflation. The consumer price index jumped 0.8% in February, bringing the total increase over the last 12 months to 7.9% – this is the largest annual jump in the last 40 years.

So, how does all of this affect the real estate market?

THE INVENTORY ISSUE
Interest rates have been kept low for so long it’s created a bubble for everything and not just the housing market. There’s also inflationary pressure on the housing market because of limited inventory. Limited inventory stems from a myriad of problems in the industry.

First, many homeowners aren’t putting their houses on the market. This is due to factors like lockdowns, but also the fear they won’t be able to find a new home to buy.

There are construction delays due to supply chain bottlenecks as well.

Low inventory means buyers are often having to put in bids well above asking to get properties, creating a frustrating situation, to say the least.

OTHER INFLATIONARY EFFECTS ON REAL ESTATE
There are a few other ways inflation can influence how much you pay for a home.

First, inflation is a reference to a rise in the price of everyday goods. Those everyday goods are used to build homes. If the price of things like lumber and appliances go up, then the builder will pass those additional costs onto the buyer in the form of higher prices.

In some cases, however, inflation can have oppositional effects on real estate. If inflation rises, then theoretically, money should become more expensive to borrow. People borrow less of it, so there are fewer home purchases and that can lead to lower prices.

REAL ESTATE CAN PROTECT YOU AGAINST INFLATION
While real estate can be negatively affected by inflation in the form of higher prices, it can also protect you from its effects.

As home prices go up over time, you’re lowering the loan-to-value of your debt. You’re simultaneously increasing your equity, but your fixed-rate mortgage payments will stay the same.

If you’re a real estate investor earning income from rental properties, then you’re likely going to be able to charge higher rent when inflation is up. You can adjust the rent while the mortgage stays the same.

The relationship between housing and inflation can go in both directions. If you’re a buyer right now, inflation isn’t good news, but if you own a home, it can be one of the best ways to protect yourself against rising prices.

HOW DOES INFLATION AFFECT HOME PRICES

Some people are comparing the 2022 real estate market to what happened in 2008 & 2009, and I want to explain why they are vastly different.

Are rates going up? Yes, Everyday.

Will this effect real estate? For sure.

In 2008, loans were provided off an average credit score of 659 with 2% down.

In 2021, loans were provided with an average credit score of 737 with 33% down.

Will this slow down home prices from continuing to accelerate? No. There is so little inventory right now that sellers continue to receive multiple offers and the competition is currently higher than it’s ever been. Additionally, investors are buying up a majority of the limited inventory because they see and understand the upside of this market.

This has stopped move up buyers from leaving their home, which is causing such little supply. We currently have the lowest inventory of single family homes in US history. Why? Because investors can continue to rent their properties for a much higher rent than they are paying in mortgage payments.

Will inflation hurt the housing market?
Yes
Builders are only building homes they can make money off of. Which means less first time home buyer homes and more move up or jumbo homes. Think luxury homes.

We printed 80% of all US money supply in the last 2 years. This is the new normal.

Also in Europe, The Bank of England has confirmed that base rate is to rise again, for the third time in three months, to a new level of 0.75 per cent.

Analysts anticipate another rise in May, taking it to 1.0 per cent.

Base rate is the official measure by which mortgage lenders determine their interest rates to consumers.

Only 6.8m homes in England now have mortgages, just 28 per cent of the overall market and about two per cent down from the level five years ago.

However, inflation is expected to surpass 7.0 per cent this year, and the widespread uncertainty as to the effect of the war in Ukraine, add to a pessimistic mood music surrounding the broader economy – and with it, buyer confidence in the housing

UK house prises continue to rise due to a shortage of family homes, the Halifax reports

Despite the worst recession since the second world war, the price of the average home in the UK has rocketed by £43,577 since the start of the first lockdown two years ago, the Halifax has said.

The UK’s biggest mortgage lender, part of Lloyds Banking Group, said the 18.2% rise increased the cost of an average home to £282,753.

Buyers seeking more space saw a 21% rise in the price of detached homes compared with a 11% rise in flat prices over the same period.

Higher mortgage rates will start to reduce buyer affordability and the amount people can borrow, which may dampen prices.

Increased living costs will inevitably affect how much first-time buyers can save, borrow and spend on a property.

As we enter the traditional springtime buyer activity season, estate agents are already reporting continued demand and a shortage of larger family houses, which means sellers can obtained higher prices.

The best time to buy real estate was yesterday, but the second best time is today.

HOW DOES INFLATION AFFECT HOME PRICES

Credit : Abc.net