What is Inflation going to do to Housing Prices?

What Happens to Housing Prices during Inflation?

As U.S inflation is the highest in 40 years, reaching 7.5% in January 2022 and strong demand is colliding with supply shortages. Consumers are seeing sharp increases for a variety of goods and services. 

Housing prices have not been the exception. According to a study done by Stanford University, researchers found that residential real estate has historically been considered an “investment safe-haven” during inflation, such as the inflationary period that took place in the 1970s. On one side of the coin, this is good news for real estate investors and homeowners, since their home’s rising values and coupled with fixed low interest rates are a great hedge against inflation.

What is Inflation? and What Are the Causes?

Inflation is basically the rise in prices of goods and services while eroding or diminishing affordability. While the Consumer Price Index (CPI) only takes into consideration the cost of good and services to reflect the inflationary rate, it does not include the cost of goods and the energy sector, which have also reached all time levels. The prices of food has been the highest since 1981 and the cost of energy has dramatically increased as well with the oil price per barrel reaching as high as $100 on February 2022.

It does not seem like inflation is going away anytime soon. The main causes can be attributed to:

1.- The Federal Reserve Bank is Controlling Inflation as they start tightening Monetary Policy. Quantitative Easing has allowed the Federal Reserve to create vast amounts of money in order to increase the money supply and lowering interest rates. It is an unconventional monetary policy  meant to increase money supply and encourage lending. However, although QE results in lower interest rates making it good for borrowers and investors, it negatively impacts savers and non-investors or those without assets. QE ultimately boosts the stock market, but uncontrolled can lead to runaway inflation.

2.- Cost Push Inflation happens when demand exceeds supply for goods and services, resulting in prices going up. As we have recently seen the supply chain issues occurring around the globe due to COVID and mandates. We have seen manufacturing disrupted as illness and lockdowns slowed business, and significant barriers for getting into the ports, such as Los Angeles/Long Beach or Oakland, where so many products arrive from Asia.

3.- Government Hand-Outs  As government provided “financial assistance” explains George Ratiu, manager of economic research at Realtor.com®. “But a lot of Americans could work remotely and didn’t need to spend on, say, takeout lunches at the office, commuting and parking, dry cleaning, and other expenses. So companies on the supply side of those goods and services needed to charge more since they had fewer customers.”

4.- Workers’ Shortage has been the result from mandates created by the government. “Companies are raising wages to address that, but also consequently raising prices,” says Lawrence Yun, chief economist at the National Association of Realtors®. “So if a bathroom sink might normally sell for $100, when you have to pay your workers and drivers more, the manufacturer must raise prices to offset that.” A record number of Americans are quitting their jobs. The Job Openings and Labor Turnover Survey (JOLTS), commissioned by the federal Bureau of Labor Statistics, found that 2.9% of Americans quit their jobs in August, the highest figure since the survey began in 2000.

Shall we say that government intervention has been the main contributing factor to inflation? YES!

How long will Housing Prices Continue to Raise?

2022 is expected to attain modest appreciation but less than previous year. Experts have the following to say:

• Danielle Hale, Realtor.com chief economist:
  ” We expect a whirlwind 2022 for the housing market. Home sales are expected to increase another 6.6% and home prices to rise another 2.9% on top of 2021 highs. A gradual uptick in mortgage rates will make affordability a top consideration for home buyers, especially the 45 million Millennials aged 26 to 35 who are at prime first-time home buyer age. Demand from these young households will keep the market competitive and fast-paced despite a small uptick in housing inventory as builders continue to ramp up production, increasing single-family starts by 5% in 2022.Although affordability challenges will come from rising prices and mortgage rates, rising rents, which are projected to increase 7.1% will be a strong motivator for many hopeful first-time buyers. On top of this, all home shoppers will have some advantages that stem from a competitive jobs market. Incomes are projected to increase by 3.3% and with many employers looking to attract and retain talent without impacting costs, we expect workplace flexibility will continue. This should free-up potential home buyers to broaden their search parameters to include the suburbs and in some cases even completely new, less pricey metro areas.

  This means we expect the suburbs and markets that offer good real estate value to continue to attract an outsized share of attention. While this has reduced the relative affordability of many such areas, they still offer a lower price per square foot and thus opportunity for buyers. On the whole, the housing market will remain competitive, but buyers will have new ways to confront these challenges.”

 

• Keith Gumbinger, vice president of mortgage information website HSH.com: “Home sales in 2022 should be solid overall, but high home prices will likely be joined by higher mortgage rates, tempering sales compared to this year. The outsized annual increases in home prices seen in 2021 should slow in 2022, but even so will leave home prices at or near record highs. At the same time, mortgage rates will tend to be firmer as the Fed ends its bond-buying programs and begins to lift interest rates by the middle of the year. Pricier homes financed with higher mortgage rates will exacerbate affordability issues, and this can be expected to dampen demand from homebuyers on the margins of the housing market.”
• Brent Fielder, executive vice president of Proper Title: “We expect to see incremental growth in housing sales in 2022, but a significant drop in refinancing activity as interest rates rise. The real estate-owned (REO) market—also called lender-owned property—will increase as Covid mortgage bailouts expire.” 
• Lawrence Yun, chief economist for the National Association of Realtors: ” Mortgage rates will drift higher as the Fed scales back the purchase of the mortgage-backed securities and raises short-term interest rates, which are likely to hit 3.7% by the year-end 2022 on a 30-year rate after hovering at 3% for most of 2021.Home sales will notch lower by 2% in 2022, principally because of higher mortgage rates. Home sales will not crash thanks to job gains, investor demand and the work-from-home reshuffle in residential location choice.

  Inventory will finally increase due to more home construction, the ending of the mortgage forbearance program and the rise in Covid-related deaths among the elderly. Softer housing demand with more supply will calm the home price growth. Home prices will only rise 3% to 5% nationally.”

• Jacob Channel, senior economic analyst for LendingTree: “Barring a major resurgence of Covid-19, we expect higher mortgage rates as well as a boost in new construction driven by improvements made in global supply chains to result in a somewhat calmer housing market in 2022. While home prices aren’t showing signs of a significant decline, price growth likely won’t be as drastic as it has been since the start of the pandemic. Instead, the double-digit, year-over-year, growth that we’ve seen in many parts of the country through 2020 and 2021, will be replaced with more manageable single-digit growth.For buyers, higher rates—which are on track to end up somewhere near 4% by the end of the year—may be a cause for concern, but it isn’t all bad news. In fact, with less competition and more housing available, some buyers may have an easier time navigating the housing market, even if they’re paying more for a loan.

  From a homeowner’s perspective, selling a house in 2022 might prove to be a bit more of a challenge than in the past two years, but even so, the average homeowner shouldn’t expect to be underwater on a home they can’t get off of their hands. “

Conclusion

Owning residential real estate has historically proven to be an “investment safe-haven” during inflationary period. Inflation is the rise in price of goods and services and diminishing affordability and erosion of the currency value. Causes of U.S inflation are mainly attributed to too much government intervention through mandates and manipulation of the economy. For 2022 Home prices can be expected to have modest appreciation, and not as drastic as previous year. As increase in mortgage interest rates and nationwide new construction supply will result in a slower 2022 housing market.