What is Inflation?
Purchasing a house is always a major decision, regardless of the surrounding financial environment. High inflation adds another wrinkle of complexity, as it tends to drive-up the prices of homes.
Before delving into the repercussions of inflationary pressures for potential home buyers, it is important to first understand some general background about inflation.
Inflation is the economy-wide rise in prices from one year to the next, and can be caused by both the rise of commodity prices (cost-push inflation) or consumer demand (demand-pull inflation). Regardless of its root cause, inflation will have repercussions for both buyers and sellers.
High Inflation and the Cost of Capital
To try and tamp down on inflation, central banks will raise interest rates. Rising interest rates make it more expensive for banks to access finance, an expense which is then passed along to their customers.
During periods of high inflation (which is considered to be 5% or above), the value of money goes down as every dollar you own will have less purchasing power. This tends to benefit those who have already borrowed monies, as their debts are now effectively worth less and theoretically easier to pay-off.
New loans, however, will be more expensive, and obtaining a mortgage (or any other type of financing) is likely to become more difficult.
Moving Fast Has its Advantages
Like other consumer goods, inflation can be expected to cause the prices of houses to rise. This increase, coupled with the difficulty of obtaining a mortgage, will make it more difficult for first-time buyers to purchase a house. However, this does not mean that it is impossible, or disadvantageous.
If you already have money saved for a down payment, or you are in a position to take advantage of one of the U.S. government’s home purchasing programs, acting fast can help you purchase a home before prices jump up too dramatically. In addition, locking-in a long-term fixed-rate mortgage before rates increase will help you save you money over the life of your loan.
As you think about the benefits and drawbacks of purchasing a home, consider the alternative. Inflation will also cause rents and housing prices to increase, potentially making it harder for you to purchase a home in the future and leaving you worse off down the road.
If you already own a house, a rising market will allow you to sell your home for a higher price. This will give you more monies to use for a down payment in the event you are looking to upgrade your environs.
Use the TipRanks’ mortgage calculator to experiment with different down payments, loan tenures, and interest rates to understand your expected monthly mortgage payments at current rates, and what this means for the overall cost of your housing loan.
Conclusion: The Right Time to Buy
Purchasing a home is always more than a question of simple finances. Ultimately, it comes down to numerous considerations and factors. While the state of your finances is paramount, there are plenty of other items to think about. This includes the surrounding macroeconomic environment, which can make a significant difference in your long-term financial situation.
Inflation will raise the cost of home prices, while rising interest rates will ultimately make it more difficult to access financing. That being said, there are certain advantages to moving fast if your situation allows. At the end of the day, the presence or absence of inflation by itself should not be the reason that you proceed with a home purchase. Just do not forget to take it into consideration when making your decision.
Learn money management, and use data-driven stock insights with TipRanks.
