by RANDY LEE, FINANCIAL PLANNER, PARTNER
There’s no hiding from it. Inflation is everywhere today. Like pollen in springtime, you almost can’t step outside without encountering it.
If you’re considering buying a home, you’ll need to factor that in. However, don’t let that discourage you!
Believe it or not, once you’ve made your purchase, real estate inflation can actually have positive effects on your piggy bank.
What Does Inflation Mean for Sellers?
In order to understand how inflation affects buyers, let’s start with the basics. First, we need to understand how it impacts the housing market on the sellers’ side.
For those who don’t recall, inflation can be defined in two ways. On one hand, it is a persistent rise in the level of prices for consumers across large areas of the economy.
On the other hand, there is a steady decline in the purchasing power of money. Both of these typically happen at once.
Rising and falling costs for goods and services don’t always signal inflation, though. Sometimes volatility within specific markets is to blame. For example, a drought can negatively impact agricultural commodities like corn.
The best way to verify the presence of inflation is by consulting the Consumer Price Index (CPI). The CPI gets compiled by the Bureau of Labor Statistics each month based on data from 38 geographic areas and 211 goods/services.
Inflation affects the real estate market a little differently than others. That’s because it has a natural inflationary sea wall for investors: People always need a place to stay.
Unlike bonds and other assets, real estate’s value never drops due to market volatility. Inflation can affect the price of materials like lumber going into the construction of new structures, but once a home is built, that ends.
If someone starts hosting group burp-yodeling therapy in their backyard, that could lower property values. Any time people flee a neighborhood in droves, it’s likely.
Inflation can’t harm real estate assets, though. In fact, if an area becomes trendy enough to boost demand for that property, prices may rise, exceeding even current inflationary rates.
So, the good news is that once you own it, property rarely loses value. The only direction inflation can send it in is upward.
How Does That Affect Buyers?
The information in the paragraphs above means exactly what you think it does for folks on the other side of a sale.
In other words, buyers won’t face higher prices due to inflation, but they definitely won’t see lowered ones because of it, either.
Now, here’s the hard part: In many areas, there are currently more homebuyers than pieces of property for sale. As a result, basic supply and demand—not inflation—are driving some of those homes’ prices higher.
The vaster number of homebuyers is actually record-breaking. It turns out that Millennials are actually the real “Boomers:” Their segment of the population is vastly larger than that of even the Baby Boomer generation.
Almost as you read this, many of them are turning 33, the age at which most people get interested in buying property.
If you happen to be a Millennial reading this, please know that we’re not holding any of the above against you. We’d actually prefer having you for neighbors over burp-yodelers (any day of the week).
These are just the demographic facts. The real estate market is saturated with buyers competing for the same limited amount of housing.
That’s probably the worst news we have to share with you. It seemed best to get it over with.
Unless you have a small fortune handy, odds are that you’ll need a loan to buy your home; a mortgage. When this post was written, mortgage rates were the highest they’d been since the first quarter of 2020.
It might be a stretch to call this a silver lining, but those rate spikes often trigger a decline in mortgage applications. Your competition may be thinning somewhat as first-time buyers struggle to qualify.
What’s the Bottom Line?
If mortgage rates continue rising steadily, a further decline in applications seems likely to follow. We certainly don’t wish for anyone to get priced out of getting a home, but those rates could at least improve the odds for the shopping-weary.
If inflation doesn’t reduce your own overall buying power through high costs for everything else, buying a new home isn’t out of the picture. You just have to keep persistent and get realistic.
Given the scarcity of properties, you may also have to settle for something livable that’s not 100% in line with your wildest dreams. Nobody’s saying “Give up on your dream home.”
However, for the time being, it is a seller’s market out there. So, many homebuyers will be better off focusing on their needs rather than dream-castle wants.
In the long run, that’s preferable to paying dream-castle prices for something that could be more affordable in a handful of years.
Besides, the rush of competition can lend temporary appeal to things we’d be less interested in as individuals, anyway. When the adrenaline fades, many desperation buys have turned out to be an overpriced privy.
That’s why we recommend sitting down and taking inventory before you lay eyes on any property. It’s okay to list some would-be-nice-es, but you need to research the important things first.
So, ahead of any house tours, make sure you've determined your...
- Mortgage ceiling. Determine the monthly maximum that you could pay safely; without having to shortchange other obligations.
- Insurance costs. Look up how much you’d need and (more importantly) confirm the maximum you can pay for premiums each month.
- Transportation expenses. Based on the current cost of gasoline, determine how much you could afford how often (e.g. for a commute to work). If you don’t have a vehicle, figure costs for bus fare—and remember: If an amazing place is a 3-hour drive from your job, pass it up.
- Utility budget. Don’t underestimate this one. Sometimes a great-looking, feature-packed home can cost a small fortune to heat in the winter or cool all summer. When you get a specific place in mind, research the local average for power, water, and waste disposal costs.
- Upkeep Stash. It never hurts to set a little money aside for rainy days—especially when you own a home. If you haven’t already, start. You never know when, for example, a shower valve will break, threatening to flood the place at 3 am on New Year’s Eve. Plumbers only work off-hours at emergency rates (their very highest).
- Homeowners association fees (if applicable). Some neighborhoods require these. They’re not usually back-breaking, but it’s worth finding out what you’d be in for when you get a place in mind.
There are more things to consider, but this is a quick-and-dirty shopping list. If all else fails, sit down with a financial advisor in Brentwood. We’re happy to answer any questions that you may have.
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