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  • Writer's pictureMike Roberts

How Inflation and Rising Interest Rates Affect the Housing Market

Inflation has risen to levels not seen in the U.S. since the early 1980s. Interest rates are rising, too, and there are clear indications they will keep going. How do these factors affect today’s housing market?

Current inflation conditions

Home prices soared over the last couple of years. New construction prices skyrocketed when the cost of construction materials rose sharply as pandemic shutdowns closed lumber mills and the manufacturers of other building materials. Supply chain problems are still being worked through. The prices of existing homes soared because of meager housing inventory. Low mortgage rates fanned high demand for both kinds of housing. As a result, many frustrated buyers lost out in bidding wars on home after home.

The nation’s central bank, The Federal Reserve, has raised interest rates several times and is poised to do so again later this year. When the Federal Reserve raises the interest rate banks to charge each other for short-term loans, lenders increase the interest rates they charge consumers in order to stay profitable. This pushes the cost of a mortgage and buying a home higher, which has somewhat softened demand for homes.

More homes, but costs are still high

Although inventories of homes for sale are up slightly, the sellers’ market still has some life, even as interest rates rise. But conditions vary from one market to the next. Sales are still strong in some markets but weaker in others.

Besides interest rates increasing the cost of lending, inflation on virtually everything impacts consumers’ budgets, whittling away at how much house people can buy. If inflation continues, home sales will soften further as housing prices get further out of reach for consumers.

Opportunities exist

The news is not all grim. Despite Fed interest rate increases, buyers who can negotiate a deal on a house soon may be able to land a home they can afford before interest rates ratchet up further.

With slowing demand, bidding wars are fading, and home prices are beginning to stabilize despite general inflation.

Additionally, if a homeowner with a fixed-rate mortgage sees her wages rise with inflation, her mortgage payment’s size shrinks relative to income as inflated salaries pull ahead of the cost of the mortgage.

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