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Inflation May Boost the Housing Market in the Short-Term, but Will Cause a Slow-Down in Price Growth in the Long-Term

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Friday June 11, 2021
Inflation May Boost the Housing Market in the Short-Term, but Will Cause a Slow-Down in Price Growth in the Long-Term

According to the Consumer Price Index (“CPI”) the cost of goods and services in May 2021 was 5% higher than it was in May 2020 which means that many household items have increased in cost; this 5% increase comes after a long period of roughly 2% inflation annually. Inflation can have an impact on the housing market, but experts are divided on whether or not it will slow down the massive growth in terms of housing prices.

In the near term, inflation could drive demand for homes up; this is because most investors see real estate as a safe investment which is almost certain to appreciate over time (e.g., it benefits from inflation). Indeed, if we look at skyrocketing housing prices, it’s clear that it is appreciating faster than the rate of inflation. Moreover, increased inflation is associated with increased mortgage rates; savvy investors, who realize this, will likely enter the market before rates increase to maximize their profits. Ironically, the rush to purchase homes before they become more expensive simply increases demand in a low-inventory market, which increases the prices of homes even more.

In the long-term, once mortgage rates increase to account for inflation, we could see a significant slow-down in housing prices (or even a drop). When mortgage rates go up, the total cost of a home increases as well. We’re already reaching the point where prices simply cannot increase anymore, as evidenced by the recent slowdown in price growth; this will likely become more pronounced in the coming months.

At the Chernov Team we understand that knowledge is power, and knowledge of how various economic indicators impact the housing market is powerful knowledge indeed. At the Chernov Team we know that whoever comes to the table most prepared leaves with the most, and the Chernov Team always leaves the table with the most.

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