As the inflation spikes of 2021 continue to impact the cost of groceries, cars, apparel and more, many Americans are wondering what it all means for prospective homebuyers. If you’re in the process of buying a home or you foresee a property purchase in the near future, inflation could play a role in what’s available and what you can afford.
What’s the Situation?
The inflation we’re seeing today is primarily related to supply chain disruptions due to COVID-19. The pandemic interrupted production, employment and transportation around the world, ultimately leading to fewer goods being produced and higher prices on the goods that do reach the market.
Naturally, this situation has also affected construction. The raw materials needed to build new houses aren’t as available or affordable as they once were – but at the same time, demand for homes has risen. With low interest rates and a trend toward saving rather than spending during the pandemic, many people find themselves financially able to buy a house. But, the houses just aren’t there. It’s been reported that the U.S. needs over 5 million new homes in order for supply to meet demand.
What happens when supply doesn’t match demand? More inflation. Because inventory is restricted, when prospective homebuyers do find a property they love, they’re willing to pay more for it. As this sellers’ market pushes prices up and up, it can become even more difficult for homebuyers to find a property that fits their budget.
What’s more, in addition to pandemic-related inflation, other factors are also affecting the housing market. The Baby Boomer generation are staying in their homes for longer, while many Millennials are reaching an age where they feel financially ready to buy a house. These colliding factors add even more pressure to the housing market, compounding the imbalance in supply and demand due to the pandemic, and pushing home inflation even higher.
The Issue of Interest Rates
The good news is that the current situation of rising home prices has little in common with low-interest-rate housing bubble that preceded the Great Recession of the late 2000s. Back then, it was risky lending practices which led to skyrocketing demand and limited supply; whereas today, the market’s low interest rates aren’t accompanied by a plethora of risky mortgages.
On the other hand, it is important to recognize where interest rates are now and where they might go in the near future. For the past few years, the Federal Reserve has kept interest rates very low, in an effort to stimulate economic growth in light of the pandemic. In effect, a low interest rate makes it easier to borrow money or take out a loan, including a home loan.
But, interest rates have already started to rise. One reason is the current supply and demand imbalance. In order to correct this and begin to tackle inflation, it’s expected that the Federal Reserve may raise key interest rates several times this year. Until they do, homebuyers will continue to have more buying power than they would in a higher-rate environment – although whether or not there’s enough supply to meet their needs is another matter.
What it means for homebuyers
If you’re looking to buy a home amidst this unique economic environment, here are a few considerations to keep in mind: