How inflation could affect real estate in 2022

aerial view of city during daytime

Rising prices and rising inflation: here’s what homebuyers and sellers need to know

You’ve probably noticed that prices for everything—from groceries to clothes to cars—are up. The US is currently in a period of elevated inflation, meaning the price of goods and services is above average. 

Consumer spending at the grocery store is usually the first to change during inflation. But really, inflation affects the price of everything, and real estate sales are no different. Housing prices are up, creating a market where mortgage holders are currently benefiting from an appreciation of their assets. 

This is great news for homeowners who are interested in building equity, but what about prospective buyers? Is now the time to buy, or should you wait it out? In this article you’ll discover how inflation is expected to affect the real estate market in 2022. 

What is inflation? 

Inflation occurs when the purchasing power of money decreases, meaning you’re able to buy less goods and services with the money you have. During a period of inflation, every dollar you spend loses value and negatively affects your ability to spend. 

Despite being seen as a generally unfavorable time in the economy, periods of inflation are actually pretty normal. Inflation is a naturally occurring economic event that’s typically supposed to rise at a slow but steady pace. 

The problem with US inflation right now is that it’s abnormally high: an annual inflation rate of 2% is generally considered to be healthy for the economy, but Bloomberg Business reports that prices climbed 7% in 2021. That’s the fastest increase since 1982. 

What caused this record increase in inflation?

A sharp rise in the price of goods and services is expected when coming out of an economic crisis, such as the Covid-19 pandemic. The last time inflation rose by over 5% was in 2008—which, by no coincidence, was also a time where the economy was recovering from a crisis. 

While disrupted supply chains and high levels of unemployment are partially to blame, the fact of the matter is that inflation hasn’t risen like this in almost four decades. 

So what’s the real reason for it?

The truth is, there are a number of factors at play here. First, unemployment is down to 3.9% as of December of 2021 (as compared to 11.2% in June of 2020). As a result, consumers have more money to spend. 

Combine this low unemployment rate with the extra $2.7 trillion in savings Americans have managed to put away over the past year, and you’ve got plenty of cash circulating in the economy. 

However, retailers and manufacturers are still experiencing significant shortages on everything from cars to chicken wings. Delivering goods and services in large quantities and at a reasonable pace is becoming increasingly difficult for businesses during this time. Put all these things together and you’ll see that every dollar is buying a little less these days as the available supply of goods—including homes—dips well below demand. 

woman standing near brown wooden cabinet
Inflation will affect homebuyers and sellers in different ways, but there is no sign that the market will slow down anytime soon

How does inflation affect home prices?

Homeowners

Inflation is usually favorable for existing homeowners, because property values tend to go up during periods of inflation. Supply is currently low and demand is high among prospective buyers, which puts homeowners in a competitive position, should they decide to sell. During inflationary periods, homeowners tend to receive offers well above market value, motivating longtime homeowners to put their house on the market. 

Buyers

Inflation tends to translate to tighter budgets for consumers. The same logic is true for homebuyers: buying a house during an inflationary period will limit your financing options. Mortgage rates typically move in tandem with inflation; therefore, the higher the rate of inflation, the higher mortgage loan interest rates will be.

Sellers

Entering the market during a period of inflation is likely a power move for sellers. With properties appreciating in value, you’re likely to sell your home or commercial property for a higher price than you would when inflation is low. That being said, sellers need to have an exit plan for leaving their current home and finding a new one. 

If you purchased your home for $200,000 and it’s currently worth $350,000, you’ll make a killing on the sale! But can you afford to buy a house in the same neighborhood for a similar price? 

Investors

Investors enjoy higher returns on their investment during inflationary periods for similar reasons that sellers do. Owners of multifamily properties can increase rents, securing higher profits on a monthly basis.

Prospective Investors

Unfortunately, prospective investors don’t enjoy the same benefits as existing investors because they’re still buyers in an inflationary market. Similar rules apply to prospective investors as to buyers. 

Keeping this in mind, it’s very important to consider timing and the kind of purchase you would like to make as a property investor. Investing for the long-term could be ideal, while investing for the short-term might end up costing you more money than you budget for. 

Short-term investments (such as property flips) can run you a pretty penny, especially when considering the fact that raw goods are typically more expensive and harder to come by. Conversely, long-term investments such as multifamily properties are typically good investments for investors during times of inflation.

When will the market improve for buyers?

If you’re eager to become a homeowner within the next year, you may be wondering when things will get better for buyers. Record-high inflation significantly reduces your purchasing power and may pressure you to go with a less desirable property, mortgage loan, or interest rate. 

To predict where the market will be for buyers in a year from now, consider where the market was before inflation. Prior to the onset of the pandemic in 2020, the housing market was already experiencing shortages. 

When the pandemic hit, people lost their income and had to quarantine, forcing everyone in the market—homeowners, buyers, sellers, and investors—to stay put. This made selling a home that much more difficult. As a result, there were even fewer homes on the market than before, driving up the prices.

Now that the real estate market is starting to normalize again, it’s expected that prices will begin to follow suit as the industry continues to address the housing supply shortage.

Keep in mind, mortgage rates also impact a buyer’s ability to secure a mortgage loan. Economists believe that the 30-year mortgage rate could rise to 3.7% (over its current rate of 3%) by the end of 2022. Depending on what steps the Federal Reserve takes in regards to mortgage loan interest rates, some buyers may no longer qualify for mortgages with higher rates. 

If you happen to have extra cash on hand and all your paperwork in order, now may be a better time to jump into the house-hunting market than the end of the year. Inflation may very well continue to rise, impacting mortgage rates and making it more difficult to secure a favorable mortgage loan in the future. 

white and brown house near green grass field under white clouds and blue sky during daytime
Home prices began rising before inflation started to rise, but prices are sure to continue to rise until inflation calms down

What to Expect in 2022

In the short-term, inflation will favor home sellers and current investors throughout 2022. The hope is that at the end of this year, inflation will return to normal levels and make it more possible for potential homebuyers to secure better deals. 

Hyperinflation is certainly a valid fear among various players in the real estate industry, especially with the ghosts of the 2008 housing crisis still looming over us. However, it’s important to note that while a decline in the real estate market is hard to predict, there’s no data suggesting that one is around the corner. 

The current economy is very different from what we were living through in 2008. The Great Resignation is contributing to a labor shortage, while the economy is growing and consumer spending is stable. Unemployment remains low and the service economy is taking off online. 

All of this suggests that the economy and real estate market will remain stable in 2022 with inflation peaking sometime this year, before making its way back down to pre-pandemic levels. As with any major financial decision, make sure to do your homework and keep an eye out for any red flags.

FAQs

Is inflation good or bad for real estate?

Whether inflation is good or bad for you depends on what side of the aisle you’re standing on. During inflationary periods, sellers typically have the upper hand while buyers are tight on purchasing power.

Does inflation negatively affect housing prices?

On the surface, inflation positively affects housing prices. However, depending on how long inflation lasts and how high it goes, it could potentially create a housing price bubble where homes are artificially overpriced. This is because inflation is not necessarily an indicator of value, but rather a reflection of how goods and services are priced.

What happens to mortgages during inflation? 

Inflation tends to elevate mortgage rates, making it harder for buyers to get the best bang for their buck when shopping for mortgage loans. Inflation also negatively affects lenders in that they are being paid back with money that is worth less than what it was worth when the loan was originally borrowed. 

In a sense, your mortgage becomes “cheaper.” Not in terms of price, but in terms of the money you are using to pay down your mortgage debt. It’s not a good idea to refinance during an inflationary period. Ideally, you’ll secure a mortgage when inflation is low. 

Is property a hedge against inflation?

Real estate tends to perform well during periods of inflation. Owning a piece of land or physical property is highly desired by most Americans. For this reason, property is considered to be a valuable hedge against inflation. 

During periods of inflation and better economic conditions, landlords can raise rents which in turn increases property values. Inflation also devalues debt on your assets—in this case, your mortgage—without devaluing the value of your home.

About the author: Vivian Tejada is a freelance writer and small business strategist based out of Providence, RI. She specializes in writing SEO blogs, property descriptions and website content for real estate companies. She’s also an avid traveler, location-independent and enjoys trying out new restaurants.

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