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Will Inflation Cause Housing Crash?

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The cost of housing and inflation are related. In fact, there are connections between inflation and the availability of any good. Consider an economy with a money supply of just $10 and a total of five identical homes as an example. The cost of each home would be $2. (assuming no other goods in the economy).

Now imagine that the central bank decides to increase money printing, causing the money supply to rise to $20. Now, the cost of each dwelling would be $4. In this oversimplified illustration, expanding the money supply results in rising inflation and housing costs.

The association is not as strong as in our example because there are many more elements in the actual economy that influence housing values. Interest rates are another significant factor driving home prices. Low loan rates can make home purchases more accessible and raise housing demand. The cost of homes will rise if the supply of housing is steady while the demand is rising. There is a more noticeable impact of inflation in large cities because the land is frequently scarce.

Housing prices represent the market’s susceptibility to the different elements that influence real estate markets. Inflation is one aspect that influences house prices. In terms of economics, inflation essentially refers to a rise in prices. Mortgage loan costs are included when one commodity or service costs more to buy, and other goods and services also cost more or less in response. The economic phenomenon known as inflation, which is frequently unwelcome, can have a detrimental impact on housing prices.

The Negative Effects of Inflation

The interest rates on borrowed money are where inflation has its most adverse impact on property prices. People may choose to borrow less money when it becomes more expensive to do so due to high-interest rates. Home purchasers may not borrow any money at all if interest rates are high, or lenders may limit lending requirements. Because of the high-interest rates, fewer people are borrowing money to buy homes, which reduces demand and frequently drives down house prices.

Robustness of economies

In economies with strong growth, inflation could not have a significant impact on housing costs. People may more easily afford increased prices, including loan rates, in strong economies because their incomes typically increase as well. However, purchasing a home is more challenging in weak or stagnant economies where income growth is often slow. Home purchasers may decide to put off their purchases during periods of slow economic growth in the hope of price drops, which frequently occur.

The Law of Demand and Supply

If you can make a better mousetrap, everyone will come to your door. Build a home that is extremely energy-efficient and reasonably priced, and consumers may swarm to purchase it despite poor economies and high inflation rates. The supply and demand phenomena occasionally outweigh inflation’s frequently unfavorable impact on house prices in specific situations. For instance, highly sought-after homes may persuade people to take all necessary measures to borrow money in order to purchase them, causing a decline in property prices.

Considerations

Many economists think that robust economic growth requires a small level of inflation. Inflation can have an impact on all of the factors that go into determining housing prices, including the price of raw materials and manufactured goods. However, it may take up to three years for interest rate increases to have a detrimental impact on property prices. However, there may not be a precisely linear link between interest rates and home prices because the relationship between the two is ambiguous.

In what way do mortgage rates and inflation relate?

Mortgage rates, which are more closely correlated to the 10-year Treasury bill, where rates typically climb slowly, are often unaffected by short-term inflation.

Banks and credit unions lend to one another over the course of one day at the interest rate that the Fed regulates. In contrast to the mortgage lending industry, where banks compete with one another for customers, this lending market is entirely different.

The rate on the 10-year T-bill has risen to 4.21 percent as of late October. The yield was around 2% in March, but it was only at 1.35 percent as recently as early December.

Since the close of last year, mortgage rates have been slowly increasing and following the Treasury bill. 30-year mortgages were available for about 3 percent throughout the majority of 2021, and refinancing activity was brisk as many homeowners rushed to take advantage of the reduced rates.

Due to the decline in demand for loans and refinancing as a result of rising rates, mortgage lenders have experienced significant rounds of layoffs.

Although the average rate had increased to almost 7% as of late October, more than double the historic lows attained earlier in the epidemic, the current figure still qualifies as low historically. (Since 1971, the 30-year rate has consistently remained below 10%; however, in October 1981, it spiked to 18.53%)

Because investors in the single-family residential (SFR) sector are already paying higher rates than homeowners, the impact of rising main residence rates on borrowing is lessened. And having property has a lot of advantages.

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