Will Inflation Help Housing?

By Brian Summerfield, Online Editor, REALTOR® Magazine

Recent news stories have pointed out that increases in the value of commodities such as oil and food may lead to alarming levels of price inflation. At the same time, the cost of renting has gone up, and is expected to surge even more this year.

As rising prices gobble up more of the American consumer’s budget, buying a home will be a more attractive proposition. Values have fallen precipitously these past few years, which initially — and, some would say, justifiably — damaged the perception of homes as an investment. But now, affordability is looking as good as it has in decades, especially in relation to renting. In fact, in many metro areas, it’s now considerably cheaper to own than rent.

Combine these pricing trends with moderate improvements in employment, and we’ve got a recipe for a housing turnaround over the next couple of years, with a few caveats:

  1. Interest rates will have to remain relatively low (no higher than, say, 6-7 percent).
  2. Some mortgage financing system that continues to offer accessible, fixed-rate loans will have to be implemented.
  3. Housing supply will have to be somewhat low — that is, no sharp, sudden increases in the shadow inventory or new construction.
  4. There are no broader economic crises that negatively affect the industry.

If those criteria are met, then we could remember 2011 as a comeback year for residential real estate.

Brian Summerfield

Brian Summerfield is Manager of Business Development and Outreach for NAR Commercial and Global Services. He can be reached at bsummerfield@realtors.org.

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  1. If inflation increases I highly doubt interest rates will stay low, however, people that are locking in low rates right now will be able to take advantage of possible, inflation induced, home price increases. Also, if wages increase with inflation your current mortgage will be a smaller % of your total income 🙂

  2. Brian Summerfield

    Hi Max. Good points, although we’ve had inflation and low rates already for some time now, so they can coexist. The Fed obviously has something to do with that, and though it can’t keep rates low forever, I think it will try to keep them down through this year. Your comment about wage increases and taking advantage of current rates is spot-on, and I think it’s important for practitioners to give serious buyers a sense of urgency. The conditions for a home purchase are especially good right now.

  3. Brian:

    Good points but I believe that what will help the housing markets most is population growth which has continued strong. By any historic metric, new construction, which is at its lowest inventory levels ever, has been underbuilt over the past several years. Household formations, which have been on hiatus during this same period, must soon return to reasonable levels and thus the housing market will recover.

    Inflation will help but the recovery will occur regardless.


  4. I don’t believe you can categorize everyone into the one group. Not all parts of the country are experiencing the same inventory levels and populations shifts / economic prosperity and hardships will most definitely impact where new construction will take place. There are many variables as you have mentioned, but the economic viability of people has to be one of the greatest factors. In my experience, the construction industry follows the regional or local job market…

  5. Purchasing a home to live in and purchasing real estate as an investment should remain two separate things in the mind of a buyer. While it is a good time to do either because of market conditions and low interest rates. Purchasing a residence should be seen as a housing expense with advantages over paying rent. It is not an investment untill someone else (tenant) is paying the mortgage. Confusing the two is one reason that things went wrong.

  6. The perception of homes as an investment is damaged because people have confused their residence with investment property. A persons residence is a housing expense that has advantages over renting a home. This should not be confused with a real estate investment. I do believe that the market conditions and low interest rates have created an opportunity to purchase both a residence and investment property.

  7. Jason Alves

    Inflation doesn’t help anything. None of the criteria outlined above will be met now or in the near future. It’s a great time to buy real estate for those who are able to. A huge number of individuals and families are unable to qualify for a home loan which is severely limiting demand.

  8. Mortgage rates have a signifigant impact on the cost of homeownership. A mere 1% increase in mortgage rate is a $20,000 loss in purchase power. This means, for those who are on the fence, if they hold out and rates increase to 6%, they will pay the same amount for a home costing 180,000 vs purchasing a home for 200,000 when the rates were just 1% less. Price however, is something people look at more when purchasing a home, but rate should be just as important, if not more important, when thinking about everything that impacts an affordable monthy payment. Rent will continue to increase as more folks are not able to purchase homes due to credit issues. Landlords as well as investors purchasing all the bank owned homes know this too. So now is a critical time to watch those rates.