How Inflation Affects Real Estate

As inflation continues to run high, we’re starting to see some of its effects on real estate. This is especially true of housing prices and rental costs, as these are some of the biggest cost drivers in the CPI index.

But how does this impact homebuyers and renters? Here are a few things to keep in mind.

Cost-Push Inflation

Cost-Push Inflation occurs when the costs associated with delivering goods and services rise broadly throughout an economy. Often, these prices are driven by shortages of key raw materials.

In these situations, companies are forced to reduce production or refuse to pay the high cost of scarce resources. The result is an increase in price for all products and services, including housing.

For example, a lawn care business may not be able to cover its costs if the price of gasoline increases. If customers live 30 miles away, the business can no longer afford to service them at current rates.

There are many different factors that can trigger cost-push inflation. Wage inflation, for example, can jumpstart this type of inflation because it provides workers with leverage to demand higher wages.

Built-In Inflation

Inflation is a common term that refers to a gradual increase in the price level of goods and services. Inflation can be caused by a number of factors such as demand-pull or cost-push inflation.

Built-In Inflation is a form of inflation that occurs when people expect wages to increase as prices rise. It is also known as the wage/price spiral.

As the price of goods and services rise, employees start to demand higher wages in order to maintain their standard of living. This increases the demand for products and services, which leads to further inflation.

This type of inflation is healthy because it encourages people to spend more money. However, it can cause serious problems if the inflation is too high. Inflation can have negative effects on an economy, including higher costs of consumer goods and services, lower economic growth, decreased cash value, slowed economic activities, and increased unemployment rates.

Interest Rates

Interest rates determine the cost of borrowing money, which can speed up or slow down economic growth. They also affect the value of real estate, which influences home prices.

The Federal Reserve determines interest rates by determining the amount of money banks must earn from loans. Banks earn this interest rate by charging borrowers a percentage of the loan principal in addition to any fees and costs.

Mortgages are the primary form of home financing, but credit cards, student loans and other forms of credit can also be affected by interest rates.

Lower interest rates make housing more affordable, which increases demand and drives up prices. This can be a good thing for buyers, but it can also be bad for sellers because they must reduce sales prices to attract buyers.

The Fed has pushed interest rates up to record levels over the past two years in an effort to control inflation. This has had a negative impact on the housing market, but it will likely stabilize in 2022.

Supply and Demand

Supply and Demand is a fundamental economic theory that governs the prices of virtually anything. For example, when there is a lot of demand for tickets to a sporting event, prices tend to rise.

A similar relationship holds for the housing market. When a large number of people want to buy a home, the prices of homes will rise.

However, the housing market is a relatively inelastic industry, meaning that a change in demand can have a significant impact on prices. This is because it can take many months to build a new house and the production process is expensive.

In addition, government policies such as reduced tax rates on capital gains can have a positive effect on the supply of new homes. Zoning restrictions and NIMBYism in certain areas can also affect the market.