Inflation and Your Home

By James Vaughn

Federal Covid-19 economic stimulus packages brought funds to people hard hit by the pandemic- who isn’t familiar with the famous stimulus checks that have gone out to the majority of American households? Everyone likes getting some extra cash, but many investors and analysts now anticipate that the fiscal stimulus measures may contribute to rising inflation in the years ahead. We’ll explore what this means for current homeowners, as well as those looking to buy a house.

1) What is Inflation?

Many people like to comment that “things cost more than they used to.” In fact, prices of goods and services are almost assured to rise over time in a free market economy. Inflation refers to the general uptick in price levels across the economy over time, creating a situation where a dollar buys less than it once did. The annual rate of inflation considers the sum total of goods and services across the economy. Therefore, while many people noticed the price of everyday goods like groceries rise at a high rate after the 2008 market meltdown, even while they lost their jobs and sources of income, annual inflation rates have remained low since then (typically around 1%-2%), driven by factors like decreasing prices for electronics which the everyday consumer may not notice.

2) Inflation and Home Prices

Inflation raises the cost of purchasing goods and property, and real estate is no exception to this rule. In a period of increased inflation, we can expect to see home values increase as well. However, inflation is not the only factor that affects home values. A situation where the number of homes on the market does not match the number of available buyers, as we currently see now, can also drive up home prices, at least to a point where affordability becomes an issue. However, if interest rates rise, that can act as a damper against value increases. A basic rule of thumb is that people have to be able to afford the homes on the market- if they can’t, then the current price levels may be unsustainable.

3) Inflation and Home Sellers

Those looking to sell a home should welcome higher inflation rates as a boon to their investment. They can likely expect to see their home increase its value at a greater rate than if the high rate of inflation had not been present. However, they should also be wary about overheating in the reals estate market market and the possibility of a dip in real estate activity. While no one has a crystal ball and there is no consensus about a coming recession after the longest period of economic expansion in the nation’s history, it is certainly a possibility given a current housing market defined by frenetic buying and quickly rising home values.

4) Inflation and Home Buyers

Home buyers have more to be concerned about with potentially high inflation rates. Housing prices tend to rise more quickly than wages, and this is especially true during a time of high inflation. In other words, buyers who find themselves stretched to buy a home in today’s market may get priced out if inflation skyrockets. While it may be tempting for these buyers to await a coming market crash to purchase their dream home, a crash is not a given. It is also a real possibility that values continue to rise, even if inflation tapers off and housing values stabilize.

Sellers and buyers should consider the potential for higher inflation among other relevant factors in their decision to sell or buy a home. As always, at Sands & Associates, we are ready and willing to assist those in Central Virginia who need to assess their current situation and determine if the time is right.