Just about all credible economists are continuing to signal the inflation warning bells, with consumers continuing to pay more for everyday necessities, such as food and gasoline (Fox, CNBC). While we’re yet to see substantive, broad housing price increases, many believe we’re going to.
“With inflation rising so aggressively and the fact that people’s salaries and weekly income are not rising at the same rate, we end up with less discretionary money to spend each month”.-George Ratiu, Manager of Economic Research at Realtor.com
Rising Home Prices
To be clear, home prices have began to rise as well. The CPI (Consumer Price Index), which measures the cost of goods and services, shows that shelter [housing] rose 0.5% in October (Olick, CNBC). The CPI takes into account both rent prices and approximate prices homeowners would receive in hypothetical rent payments.
Separately, it’s critical to note one month almost never gives any sort of definitive indication. However in August 2021, home prices were up 19.8%, a staggering increase (S&P CoreLogic Case-Shiller Indices). Nothing is definite yet, but renters would be wise to begin lowering their other budgetary expenditures. First and foremost, you will have less disposable income every month since you’re paying higher prices. However secondarily, according to Realtor.com, we’re also seeing mortgage rates climbing. Compared to a year ago, buyers are now spending on average $160 more a month on mortgage payments. Many experts believe those rates will continue to climb.
“Generally as we see inflation go higher, we are going to see mortgage rates go higher”.-George Ratiu, Manager of Economic Research at Realtor.com
Hedging Against Inflation
Historically, real estate has largely been viewed as a hedge against inflation. With a mortgage, you lock in a fixed monthly payment for the term of the loan, which is definitely long-term. In turn, this shields you from sharp volatility in prices. Additionally, home values have traditionally at least kept up with inflation (Cox, CNBC).
“Homes are expensive now … but for most people the comparison that is most important is how that cost of home ownership is going to compare to the cost of renting”.-Jeff Tucker, Senior Economist for Zillow
Of course, rent is more unpredictable than locking in a fixed mortgage monthly payment. Over the course of your mortgage repayment, rent prices are almost certain to go up.
“If wages are rising or if the cost of building materials and appliances and light bulbs and paint is rising, all of these to some extent will flow into the cost of maintaining and building rental homes”.-Jeff Tucker, Senior Economist for Zillow
Furthermore, as seasoned investors are aware of, supply and demand often dictates housing market prices. According to CoreLogic, demand rose 10.2% nationally in September 2021 compared to where it was in 2020. On the flip side, a Realtor survey of 1,300 homeowners from fall 2021 found 26% plan to sell their home within the next 12 months. This figure is more than double the percentage of their same March 2021 survey. Overall, the consensus appears to be buying over renting, so long as you can afford it.
“Historically, you are likely to get some of the best bargains of the year. I think 2022 has the promise of providing less competition, a lot more homes to choose from and, as a result, a lot more approachable prices”.-George Ratiu, Manager of Economic Research at Realtor.com
At the same time, you may want to reconsider talking yourself into buying a home based on price alone.
“The house is the place where your family is going to live every day”.-Jeff Tucker, Senior Economist for Zillow