Earlier this year, the US inflation rate rose to a forty-year high at 7.5%. There was strong consumer demand for a wide range of products. However, it was mostly unmet due to pandemic-related supply disruptions. As inflation’s effects started to make themselves felt throughout various sectors, some central banks raised interest rates to curb it.
A leading name in Seattle real estate, Blue Pacific Real Estate often gets questions from concerned clients wondering how this steep rise in inflation and interest rates will affect the prices of new homes.
Housing Demand and Inflation
The real estate market fluctuates because of several factors, including major economic events. In 2020 and 2021 alone, the industry felt the strain due to the high demand for homes and residential properties and the lack of inventory. It led to a surge in prices for homes as well.
Because inflation refers to a decrease in the purchasing power of money, the average prices of goods and services across industries are affected. These include real estate. The pandemic-driven demand has already raised prices—inflation may exacerbate the situation.
How Inflation Affects Homeowners and Residential Property
Higher property value
This is a positive development for homeowners because the value of their homes and residences increases along with the inflation rate. And with the current housing market demand, if a homeowner chooses to sell their home, they can price higher than they initially projected. Furthermore, the seller may find that the offers they receive are higher than they expected.
Lower historical debt
Inflation increases mean any existing debt also gets cheaper. For example, if you bought your home five years ago for $130,000 with a $25,000 down payment, you have a 25-year mortgage for $105,000 with a 3% interest rate.
Now, if inflation increases 3% for every year after your purchase, you’ll still be paying $498 annually, but the value of your money has gone up every year since. This keeps the relative costs of your debt low.
Higher mortgage rates
This also means that mortgage rates will increase along with the nation’s interest rate. If interest rates are low, consumers will borrow more. But rates are going up as central banks fight off inflation, and as a result, consumers would rather stay where they are than spend. Returns won’t be as good with higher interest rates.
Construction costs increase
Let’s say that you’re a homeowner planning to renovate or rehab your home to sell it at a higher value. You’ll find that with the increase in interest rates, along with the supply issues caused by the pandemic, the price of building materials has also risen.
The cost of everything involved in home building increases, including not just the supplies but also equipment, machines, and wages. If you plan to renovate your house or remodel it for selling, you’ll have to factor in inflation in these areas in your computations on how much of a return you’ll get.
Residential performs better
Residential properties historically perform better during times of high inflation. If you have a single-family or multi-family home, your property will likely outperform other investments like stocks and bonds.
A Stanford University study found that real estate acts as a hedge for inflation because home prices rise in proportion to the size of the economy. Properties are also less tied to consumer prices, and with the increase in construction costs, they have less competition from new homes.
Make the Most of the Residential Property Boost
With national inflation at a significant high point, homeowners must take advantage of its benefits for residential properties. To do this, you need to consult with real estate professionals with the knowledge and experience necessary to help you navigate the market.
Blue Pacific Real Estate’s roster of veteran real estate agents has navigated the real estate market’s highs and lows. We know how to assess all factors affecting home values to help you strategically price as well as sell your home.
Call us today for a consultation, or read more about what we do.