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How Is Inflation Affecting the Housing Market?

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The U.S. housing market is undergoing a rebalancing. Visit HomeLight’s 2022 Housing Trends Hub for information on how to navigate a shifting market — whether you’re a seller, buyer, or homeowner.

Even if you’re unsure of how it’s defined or measured in terms of the economy, chances are you already have a clear understanding of the impact on your budget. Beginning in 2021, you probably noticed the cost of goods and services you routinely purchased have been increasing exponentially.

Inflated prices have deflated your purchasing power. Your paycheck isn’t going as far as it once did to pay for rent, groceries, gas, and other essentials.

Those higher prices aren’t limited to just your city or just a few items on your shopping list; they’re being felt across the country and in all sectors of the economy, including healthcare, retail, automotive, education, and utilities.

What is the current inflation rate?

In July, Consumer Price Index (CPI), which measures the year-over-year change in the average prices consumers pay for goods and services, grew by 8.5%.

Although grocery prices have risen 12% in the past year, the cost of energy is responsible for half the increase.

And, the U.S. is far from alone. A Pew Research Center analysis of data from 44 advanced economies found consumer prices have risen substantially in nearly all of those countries since the pre-pandemic era.

So, to help you navigate in this new world where everything costs more, we’re arming you with the latest information about:

  • what is causing inflation
  • how it’s affecting the housing market; and,
  • the steps you can take to make the most of that market and to combat inflation for the good of the country and your bank account.

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What is causing inflation in 2022?

In the simplest terms, higher prices tend to result when demand exceeds supply.

Among the social and economic factors that have contributed to inflation in 2022 are:

  • Strong demand for consumer goods and services partially due to the U.S. Government COVID-19 Economic Stimulus and Relief Plan
  • Broken or clogged supply chain
  • Shortages of key raw materials
  • Worker shortages caused by the Great Resignation
  • Rising oil and gas prices
  • War in Ukraine
  • Pandemic relief programs
  • Supply chain shortages
  • Increase in the cost of raw materials and operating costs

How does this rate compare to past inflation events?

Just to be clear, this isn’t your grandmother’s inflation.

Beginning at approximately 2% in the late 1960s, inflation ballooned to 12% in 1974 and 14.5%  in 1980.

Finally, the chairman of the Federal Reserve tamed the economy by raising the rates to 20%. It took until 1983 for inflation to fully retreat to 3%.

Even though current interest rates are the highest they’ve been in decades (around 5%-6%), they pale in comparison to those of the 1970s and 1980s.

How is inflation impacting the housing market?

Just like other sectors of the U.S. economy, the housing market has felt the impact of inflation. Fortunately, indicators refute the idea the housing market is poised for a crash; but, they do show it’s definitely changing.

For example, top Tulsa agent Luke Rentz recalls an existing single-family 1,100-square-foot home that needed a few repairs in the fast-growing suburb of Broken Arrow, Oklahoma, typically cost $130,000 in 2019. Today, buyers would expect to pay about $200,000 for that same home.

Likewise, Rentz says the cost of a starter home rose from $110 to $120 per foot to approximately $170 to $180 a square foot in some areas.

That represents approximately a 54% increase over a two-year period.

What does inflation mean for new construction?

Before COVID, when the housing market demand exceeded supply, builders were all too delighted to ramp up production.

By 2021, supply chain issues first caused lumber costs to spike, followed by spray foam, PVC pipe, and wiring. Rentz now estimates the cost of all building materials has risen anywhere from 20% to 40%.

However, “The biggest expense now,” Rentz reveals, “is the actual labor.” One builder recently lamented the cost of seam-taping between drywall has increased four times. In the past, he could have completed the whole job for what he now pays in labor costs.

Should savvy sellers wait out inflation or enter the market now?

If you are considering selling your home, inflation is not a reason to wait. The delays, high prices, competition, and frustration with new construction have definitely driven buyers toward the purchase of existing homes.

Unless their property requires extensive renovations or repairs rely on the availability of scarce materials and overbooked contractors, sellers remain insulated from high prices of materials and labor.

In fact, sellers don’t even have to be longtime residents to realize a sizable return on investment. Rentz has resold many homes for clients who bought a new home only to relocate (due to transfer, divorce, or other life circumstances) within six months.

“They walked away and typically made $20,000 to $30,000 on a house that they built,” says Rentz.

Ironically, those gains are sometimes tempered by inflation. Those sellers now have to find another place to live. That usually means competing for higher-priced properties — rentals as well as single-family homes.

“So, inflation just really hurts everyone in general,” he says. “The market is definitely taking a slight step back.”

However, one segment of buyers seems to be bucking that trend and actually gaining purchasing power despite inflation.

Typically, people who downsize sell their homes with a lot of equity, so they’re able to pay cash for their next home.

“We can see them becoming more involved or being a major player in the next market,” he says.

Clients who don’t rush, get too emotionally attached or too worried are more successful. Being patient and having a good foundation is the key — regardless of the market.
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Is it smart for buyers to delay their home search until inflation subsides?

Even with the interest rating increasing and the number of homes on the market slowly increasing, well-priced houses in good condition with attractive locations and floor plans still get multiple offers.

“Before we routinely received 15 to 20 offers,” Rentz says, “now, it’s usually closer to five to 10 potentially.”

It’s hard to remain calm in the face of fierce competition and rising prices.

So, Rentz routinely encourages buyers to:

  • be patient
  • stick to the fundamentals
  • make strong offers when possible
  • avoid overextending; and,
  • fight the temptation to abandon your budget just because you really like a house or you feel like it’s necessary to get a home.

“Clients who don’t rush, get too emotionally attached or too worried are more successful,” he says. “Being patient and having a good foundation is the key — regardless of the market.”

What are the advantages of working with an agent in the current market?

Rentz says the challenges of buying a new home aren’t limited to purchase price. As a buyer’s agent, he was recently involved in a situation with a builder, who developed an entire neighborhood of 1,600- to 2,000-square-foot homes.

Delays in receiving windows, shingles, and other materials pushed back the city inspection and other timelines. Eventually, the builder told more than 20 homebuyers that they could either pay up to $30,000 more for the home or cancel their contract.

While there were delays and supply chain issues, “I also think it was a business decision,” Rentz says. “They realized those homes would be worth $40,000 more in today’s market than when they originally sold.”

To give his shocked clients enough information to make a decision, Rentz reported, “Even with the additional $30,000, you’re still going to come out with equity in this house.”

Many builders create their own contracts. So, unless they’re market savvy or have a good agent, buyers can get caught in a situation in which builders can cancel for no reason. If that happens, few buyers have the time and resources to pursue legal action.

To help you avoid common pitfalls, HomeLight has created a list of dos and don’t of buying in this market.

A great agent can also help homeowners realize their dream in other ways.

In working with buyers with tight budgets who struggle to cover closing and other costs, Rentz might search for an off-market property that needs some TLC that the buyers can manage themselves.

Occasionally, he’s identified a home for a client, acquired the property from a seller, made the necessary repairs to qualify for a loan, and sold the property to his pre-approved buyer.

“The overall increase in prices has definitely pushed buyers out,” Rentz says. “The more creative you can be, the better you can find a solution.”

What can I expect if the inflation rate continues to climb?

Any time the Federal Reserve raises interest rates to control the demand side of the economy and stabilize inflation, it shrinks consumers’ purchasing power. So, prices may continue to rise for a while.

If mortgage rates continue to rise, Rentz predicts a slow down in the market. “There’ll be fewer people who want to buy,” Rentz says, “because the payments are going to be quite high, and there’ll be harder to sell properties.”

In such a scenario, lower income and first-time buyers are likely to be disproportionately affected compared to wealthier individuals with greater resources and longer credit histories.

A little perspective helps survive these unprecedented times

Undoubtedly, we are living in unprecedented times. A historic international pandemic has given way to the most staggering inflation rate in a generation, which has compromised Americans’ ability to purchase everything from gas and groceries to homes and cars.

However, some economists are encouraged that the inflationary environment has been around for a relatively short time.

In addition, July’s CPI declined from the June rate and was lower than the record March figures, the lessening of consumer demand, and the stability of wage costs (gross wages before tax plus compulsory contributions such as social security) show a slight indication that inflation may be slowing.

Perspective is equally important in the real estate market.

Since a home is typically a family’s largest investment, buyers are collectively worried about paying an inflated price for a home in this seller’s market, owing more than their home’s value, and being unable to get their equity out later.

Often those concerns result in negotiating aggressively to save a few thousand dollars and walking away from a deal only to spend more time and energy pursuing another property.

”Sometimes, paying a little bit higher price can be worth it — if you’re going to be in a house that you really love for years,” Rentz says. “So having that long-term focus is definitely very helpful.”

Whether you’re buying or selling a home and are concerned about the impacts of inflation on your homeownership, “It’s important to work with an agent who can educate you, so you have a better understanding of the market and how to set expectations,” Rentz says.

Luckily, it’s easy to find a top-performing agent in your area. By simply answering a few questions on HomeLight’s website, its free Agent Match platform will analyze more than 27 million transactions and thousands of reviews to connect you to agents who can help you navigate the real estate market.

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