What Inflation Means for Homeowners

Inflation impacts the cost of everything from the food you buy at the grocery store to the gas you put in your car. So perhaps it’s no surprise that when the prices of goods and services rise, the cost of real estate does as well. Indeed, inflation has multiple effects on the housing market—and the most noticeable is an increase in home values. 

In addition, the Federal Reserve’s response to inflation can impact home loans. The Fed has already increased interest rates on loans to combat rising prices and is set to hike rates even more in the coming year. While this doesn’t affect homeowners who have a fixed-rate mortgage, it may price borrowers out of homes they used to be able to afford.  

All that’s to say—inflation will affect the housing market. And whether it proves an advantage or disadvantage depends on your current status as a mortgage holder and whether you plan to buy or sell real estate in the near term. 

The inflation-real estate connection  

Inflation refers to the increasing costs of goods and services. Some amount of inflation is normal. For example, while the Federal Reserve doesn’t have a specific inflation target, it generally aims to keep inflation around 2% annually. The reason that inflation has been such a hot topic is that we’ve blown past that benchmark. For example, the Consumer Price Index (CPI) increased by 9.1% in June 2022, compared to the previous year. That’s the CPI’s most significant jump since 1981. 

Many factors cause prices to rise, including supply chain issues, worker shortages, and increased demand for specific products. But what does it mean for real estate? Inflation plays out across the housing market in a few ways. First, more investors tend to jump into real estate during times of high inflation as they look to hedge against inflation fallout in other sectors. This boosts the demand for property, which drives prices even higher. What’s more, rising material costs also make homes more expensive to build. 

So, prices continue to rise. However, as noted above, the Fed is increasing interest rates to help keep inflation in check. As that happens, mortgages become more expensive and make it harder for home buyers to qualify for loans or afford properties in their respective markets. They effectively lose buying power. 

Is inflation good or bad for homeowners?  

The answer to this question depends on whether you have a loan, what kind of loan it is, and how long you plan to own your home. So let’s start with how inflation may benefit homeowners with a fixed-rate mortgage: 

  • Your relative expenses remain the same, despite increasing home values. Though interest rates on new mortgages may be higher, your monthly payments remain the same. This is especially appealing if you obtained a mortgage in the past several years and benefited from historically low rates. 
  • Your home value increases. As noted, inflationary pressure often leads to increased demand for homes and thus drives prices up. If you plan to sell your home, you’re benefiting from a seller’s market, and those high prices work in your favor.  

However, if you have an adjustable-rate mortgage or want to buy a home, inflation may prove a headwind for the following reasons: 

  • You have less buying power. Buyers get hit with the double whammy of increased prices and increased mortgage rates. This reduces their loan-to-value ratio and makes it harder to obtain financing and qualify for better loan products. Overall, buyers see a reduction in what they afford in their market. 
  • The housing supply is low. Worker shortages and high material costs have slowed construction and reduced the housing supply. Even if you sell your home and benefit from the rising home prices, finding a new house to buy or rent may still be challenging.  

How can you protect yourself in case of a recession?  

The trouble with inflation is not just that homes and other things become harder to afford–the high prices can eventually slow economic activity, which can lead to a recession. That’s why the Fed is currently trying to find the sweet spot by increasing interest rates to slow inflation while keeping them low enough to encourage spending and borrowing. 

It’s a unique time for homeowners. Fortunately, there are steps you can take to mitigate your inflation and recession risk:  

  • Locking in your mortgage interest rate. With rates continuing to rise, explore whether refinancing into a fixed-rate mortgage is possible. You can ensure your housing costs will remain fixed, and you’ll be less impacted by interest rate volatility in the coming months. 
  • Repurposing real estate for added income. With housing in short supply, consider renting out a portion of your property to earn additional income. For instance, some homeowners rent their additional dwelling units or put their homes on vacation rental sites to make money while they’re away. 
  • Waiting out the rising prices. It’s not possible to time every move. But with the risk of a pending recession, consider whether upgrading to a bigger home and potentially bigger mortgage payment is the right move for you right now.  

A recession investment  

In the past, recessions have led to decreasing home values—and created opportunities for investors to scoop up real estate at bargain prices. However, whether a potential recession will impact home prices this time around remains to be seen. Currently, the demand continues to outstrip the supply, even as prices have been going up. 

That said, real estate investors should be ready to take advantage of any decrease in value or even slowing of rising prices. Recession or not, the best advice for real estate is to focus on location and search for properties in desirable or up-and-coming areas. What’s more, keeping an eye on cash flow is also essential. You want to make sure that the investment property can earn an income even after you pay the mortgage and maintenance. 

Inflation is a tricky beast—and how it impacts homeowners depends on their situation. Evaluate your mortgage terms, property values, and personal financial goals before making any sudden moves to ensure that you’re protected from rising prices and a potential economic downturn.


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