How Does Inflation Impact the Real Estate Market?

When you're considering adding a piece of real estate to your investment portfolio, it's a good idea to consider the state of the economy. Among the most important economic indicators is inflation, which is the average price increase for goods and services. During inflationary periods, the dollar’s purchasing power is often weaker. While buyers and investors often become wary when inflation is high, this isn't necessarily true in the real estate market. This guide offers a detailed and in-depth answer to the question, “How does inflation affect real estate?”

When looking at historical trends, increases in home values have outpaced inflation. In this scenario, the value of a home increases more than inflation. In 1963, the Consumer Price Index was 30.6. This index is now 308.417, representing an increase of around 908%. During the same period, home values increased from $17,800 in 1963 to $417,700 at the end of 2023. This marks a rise of 2,247%.

From this data, we can deduce that home values increase at a faster rate than inflation. However, this isn't the only way inflation impacts the real estate market. The consumer price index for rent, has increased from 40 in 1962 to 412 as of January 2024. This is an increase of 930%, which nearly matches that of inflation. When comparing inflation and housing prices, home values have risen at a much quicker pace.

If you're wondering, “How does inflation affect mortgage rates?” The Federal Reserve often chooses to increase them when inflation goes up. Inflation reports and mortgage rates are heavily correlated. When the Federal Reserve increases or reduces the Fed funds rate, banks and other financial institutions follow suit. At the end of 2021, the Fed funds rate was close to 0%. Since August 2023, it’s been at 5.33%. Because of this increase, interest rates for a 30-year mortgage are just under 7%.

When the Federal Reserve increases the Fed funds rate, borrowers typically start saving money, so they seek fewer loans. Most homeowners purchase properties with the help of mortgage loans. In early 2021, interest rates were as low as 2.65%. If you obtain a 30-year mortgage for $300,000 with an interest rate of 2.65%, you'll spend just over $353,000 throughout the loan. When the interest rate is 7%, your total costs will be around $556,000. A 4.35% swing in the interest rate leads to you paying over $200,000 more to purchase the same home.

Buyers tend to be more skittish when inflation and interest rates are high. However, the value of owning a home has never been more apparent, which is why many prospective buyers continue to enter the market. Since the housing supply has been low for several years, there's no reason to believe the trends will reverse.

Real estate and inflation have a lengthy and intertwined history. If you’re considering adding a property to your investment portfolio, you may have heard that real estate can be used as a hedge against inflation. While you shouldn’t view any investment as a sure thing, you can effectively use real estate as a hedge. Since real estate prices outpace inflation, you can be reasonably confident that the value of your portfolio may increase at a time when many other types of investments suffer.

Keep in mind that rent also increases when inflation is high, which is why rental properties are appealing to many investors. Real estate investments are often held long-term, ensuring that short-term market fluctuations don’t cause major issues.

Before you use real estate as a hedge, remember that the value of money dissipates when inflation is high. In this situation, the costs of maintaining and managing the property can also increase and offset some of your gains. When you decide to use this strategy, there are several techniques you can implement. Along with standard real estate investing, you can buy REITs, acquire property debt, and put your money into emerging markets.

Increasing interest rates won't impact you if you can buy a property with cash. Once you own a piece of real estate, you can benefit from higher interest rates and increased rents, which makes it even easier to remain ahead of inflation.

High inflation means different things for both buyers and sellers. Buyers need to contend with low inventory and high prices. For the real estate market to be balanced, there needs to be around five to six months of housing inventory available. At the end of 2023, the housing supply was just three-and-a-half months, so buyers will continue to pay high prices.

First-time buyers might want to wait until interest rates drop, which is expected in the second half of 2024. For investors, buying now is advantageous despite the high upfront costs.

For sellers, inflation often doesn’t have much of an impact. Since the price of homes increases faster than inflation, the investment doesn't lose any value. The housing shortage is the main factor in the real estate market from which sellers are currently benefiting. Home values should continue to rise as long as there’s a housing shortage on the market.

If you’re in the market to buy or invest in a property, there are several things you can do to avoid paying too much. For example, look for a lender that doesn't have many fees. If you can get a loan without an origination fee, you can avoid paying 1% of the property's cost. You could also negotiate with your lender to reduce the closing costs.

It’s a good idea to lock in a mortgage rate as early as possible. When you initially apply for a mortgage, your lender may allow you to lock in the rate, protecting you against future hikes.

You may also be able to reduce the costs of purchasing a property by requesting assistance from a local homebuyer program. These types of programs are often available for first-time or low-income buyers. An example of a homebuyer program is one that covers some of the down payment for a first-time buyer. Many financial institutions provide discounts to first-time buyers that lower the fees and closing costs associated with acquiring a home.

Before applying for a loan, consider alternative mortgage types. While conventional loans are the most commonly available to buyers, you might also qualify for several government mortgages. The three government mortgages are FHA, USDA, and VA loans.

A VA loan is available to veterans and active service members only. The Federal Housing Administration (FHA) backs an FHA loan, while the USDA mortgage is supported by the United States Department of Agriculture (USDA). FHA and USDA loans are available for low-income individuals, the latter of which must be used to purchase select suburban or rural properties. All government loans come with low down payment requirements and favorable terms.

Buying a home doesn't need to break the bank. You can save money by making an offer on a foreclosure home. Once a lender forecloses on a property, it goes up for an online auction. When you enter your city, state, or zip code on our website, you'll be able to see all auction properties in the surrounding areas. If you find a home you're interested in, you can register and bid online or find Foreclosure Auction properties scheduled for sale near you.

This process is made easy with the resources available through ServiceLink Auction. Our Customer Service team is on hand if you have questions regarding the auction process. Sign up with ServiceLink Auction to search for your next investment property today.