Real Estate, Inflation & Interest Rates-Oh My!

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Real Estate

Hi!  Welcome back to #MentorshipMonday!  Many people are experiencing anxiety and confusion about the real estate market, interest rates, and inflation.  Inflation is a general increase in prices and fall in the purchasing value of money.  Think of it this way--if a loaf of bread costs $1.00 today and nothing about the bread changes overnight, (except the price)... and tomorrow, it suddenly costs $1.50...that is inflation.  

In fact, on April 5, 2022, Governor Lael Brainard of the Federal Reserve stated, "Today, inflation is very high, particularly for food and gasoline."  The Federal Reserve is assigned the responsiblity to pursue price stability and maximum employment.  Moreover, experts forecast a rise in interest rates as the Federal Reserve attempts to slow down inflation.  That can be tricky.  There's also a psychological factor in the mix--when the public thinks that the cost of living will be higher, they adjust their behavior accordingly.  Businesses boost the prices they charge and workers demand better wages.  Unfortunately, this cycle can spin out of control and drive inflation even higher.  

On the other side of the ledger, historical data shows that real estate is an effective hedge against inflation.  This was true even in the 1970s and 1980s when inflation was at a record high due to low job growth and unemployment.  Real estate holds intrinsic value because it is scarce.  There is a limited supply of properties.  This is good news for current property owners as demand for real estate does not generally decrease, even when inflation rises.  In fact, in most areas we are seeing property values increase.  The real estate market is hot and we expect that trend to continue.

Factoring all this into the equation, you may be wondering if this is a good time to buy a house?  Consider instead--is it a good time in my life to buy a home? 

The market indicators we just reviewed provide important context.  Whether it is the best time for you and/or your family--to buy or sell--depends on your particular situation and circumstances.  Here are 4 things to consider before making a decision:

1)  Demand is high and supply is low.  In real estate, that translates to a seller's market.  A seller's market is what happens when there are more prospective buyers than there are homes for sale.  Competition means fewer choices and higher prices.

2)  Higher mortgage rates.  The Federal Reserve has announced their intention to raise interest rates.  That will affect housing affordability.  To keep that in perspective, most mortgage forecasters predict the average 30 year fixed interest rate to stay below 4% in 2022.  Compare that to the fall of 1981...interest rates peaked at just over 18%.  In the last 5 years, the average rate peaked at just over 5% in 2018.  In comparison, today's interest rates remain low.

3)  Higher sales prices.  Median home prices are expected to increase by 5.7% year over year in 2022 according to NAR.  Home prices are expected to rise at a slower pace, but continue to escalate throughout the year.

4)  Are you ready to buy a home?  Think about your life goals, relationship expectations and financial considerations.  How long do you see yourself at this location?  Ideally, you will want to remain in your house long enough for rising property values and equity to exceed the cost of buying and selling.  This typically takes several years.  A mortgage is a big commitment and can become a stressful burden if you aren't adequately prepared.

At Shaffer Realty and Real Estate, we are your trusted source of real estate best practices and support.  If you are looking to buy or sell, we can connect you with one of our trusted, experienced real estate professionals.  They can help you successfully navigate today's complex real estate market.  Have questions?  Contact us today.  See you soon!  Warmly, Susan