Is Inflation Good For Homebuyers?

Inflation Good For Homebuyers?

As we have all heard by now, inflation has been a problem not just in the United States, but the entire world in 2021 and 2022. Because of this, we have seen the Federal Reserve work hard to bring it down. To bring down inflation, their number one goal, they are forced to raise short-term rates which impact long-term mortgages. However, they have yet to be successful in their mission to tackle inflation. On the bright side, home prices have began to stop appreciating rapidly, and in some cases are falling month over month. But the question remains, is inflation good for homebuyers?

Inflation, inflation, inflation…

It is hard to escape the inflation we have seen in our everyday life. From gas prices, to food and heating costs, it has been noticeable to everyone. Now, we have started to see rents increase at a historical rate, adding to the inflation pressures. However, this can answer our question of is inflation good for homebuyers? The pinch we have seen in our wallets is hard to ignore, but for those who bought their homes, you have a little reprieve from these price increases. That is because you have locked in a monthly payment, while renters are still at the subject of rent increases.

Inflation and Homeownership

Historically, we have seen a positive correlation between inflation and owning a home. Homeownership might be the best hedge against inflation, especially for those who were able to lock in historically low interest rates in 2021. Locking in a mortgage is why inflation is good for homebuyers. A homeowner is able to secure an appreciating asset while allowing to spend more in other categories. Being able to stabilize monthly expenses is a key reason to purchase your home. As James Royal, senior wealth management reporter at Bankrate says:

“A fixed-rate mortgage allows you to maintain the biggest portion of housing expenses at the same payment. Sure, property taxes will rise and other expenses may creep up, but your monthly housing payment remains the same.”

Renting Is Getting Harder

With rents likely to remain high even as inflation starts to subside in the coming years, it will be hard to stabilize monthly expenses longer than a lease term. Future rate hikes are also a reason that buying a home should be a top priority during inflationary periods. The Federal Reserve is likely to raise rates to close to 5% on their terminal rate, which will lead to higher mortgage costs across the yield curve. We have a previous article talking about how the Fed impacts mortgage rates. According to Lawrence Yun, chief economist at NAR (National Association of Realtors),

“Inflation refuses to budge. In September, consumer prices rose by 8.2%. Rents rose by 7.2%, the highest pace in 40 years.”

Inflation Good For Homebuyers? Probably…

So, when you rent, you are at subject to historical price increases when your lease is up. Unfortunately for a lot of renters, when their lease is up, they will no longer be able to afford the new rate. However, with owning your home, your lease is never up and your monthly payment will only increase if the tax rate increases. Inflation good for homebuyers? Well, we would say so. If your rent increases by 7% in a year, alongside a near 20% increase in food and gas prices, you will feel the squeeze. However, for homeowners, they can focus more of their budget to inflationary aspects of the economy. Not to mention, inflation helps real estate prices. So, not only are you able to adjust your budget, but you are actually likely to increase your net worth faster than inflation. Owning a home should be a goal for anyone who is able to.