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As a Homebuyer, You Can Turn Inflation From an Enemy to a Friend

As a Homebuyer, You Can Turn Inflation From an Enemy to a Friend
Tim Lucas - Home.com
VP of Content, Home.com

Inflation just posted its highest reading in 31 years.

The Bureau of Labor Statistics reported an inflation rate of 6.2% in the 12 months prior to October. Compare that with the October 2019 rate of 1.8%.

There’s no doubt inflation has become “a thing” again in 2021.

Prices have risen in recent months as the economy opens up post-COVID and people needed more goods and services.

What happens now?

Well, higher prices have arrived for everything from milk and gas to homes and rent. Not that you’ve noticed.

What's in this Article?

Why is there inflation now?
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Why home inflation will continue into 2022
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Inflation drives up mortgage rates
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How to get inflation working for you, not against you
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Why is there inflation now?

There are a lot of things that contribute to inflation – and they all seem to be happening at once.

There’s a shortage of workers, so companies have to pay more to attract and retain employees. These businesses need to recoup those costs by passing them on to the consumer in the form of higher prices. This is called wage-push inflation, and it’s rampant right now.

According to the Bureau of Labor Statistics (BLS), wages increased 4.2% in the 12-month period ending September 2021, compared to 2.5% the year before.

Supply chain disruptions aren’t helping. The world all but shut down for the better part of a year. Then, seemingly overnight, everyone wanted stuff. The problem was, there were too few workers and diminished infrastructure to handle the demand.

Additionally, the federal government has been on a spending spree, and for good reason. Without it, the U.S. may have slumped into a much deeper and longer recession than it did.

Still, the Federal Reserve bought up $4.5 trillion in U.S. Treasuries and mortgage backed securities to keep interest rates ultra-low. Additionally, Congress provided $669 billion in paycheck protection to businesses, which went to pay employees who could not work due to shutdowns.

These and other “easy money” policies increased the supply of dollars within the economy, making the value of each dollar worth less. From January 2020 to September 2021, money supply increased over 35%.

With all the extra dollars floating around, it’s not too surprising that businesses – and home sellers – are requiring more of them for the same products.

Related: Federal Reserve Announces Taper Plan Clearing Way for Higher Mortgage Rates

Why home inflation will continue into 2022

You notice inflation in simple things, like milk. Last year, maybe it was $2.50. Now it could be $3.00.

That’s a 20% jump. Still, it’s not too noticeable when talking about milk. A little more eyebrow-raising when you’re looking at homes.

Let’s multiply the above scenario to reflect home prices. Yes, a $250,000 home last year is now $300,000, or even more in some markets. The widely followed Case-Shiller U.S. National Home Price Index shows a 19.84% annual increase as of August 2021.

And home prices are expected to climb between 2-16% in 2022, depending on who you talk to. What’s going on?

The new boomers

First, a never-before-seen number of homebuyers are entering the market. Millennials represent a population boom bigger than the OG boomers who thought their generation was big until now.

And they are coming at Tesla speed, all turning the magical age of 33 (prime homebuying age), seemingly all at once.

And they’ve all decided that owning a home is a good idea, a shift from when they were younger as they watched the less-than-ideal experience Gen X had, with 50% price crashes and all.

And as the arrow below shows, elevated numbers of millennials will be entering prime homebuying age for the next five years.

us population by age graph
Image: National Association of REALTORS®

In short: there probably won’t be a let-up in demand for homes. And high demand leads to higher prices.

The mantra of 2021: ‘Supply chain disruptions’

Here we won’t belabor the point because you’ve heard it before.

Supply chain disruptions and shortages are making it more difficult and expensive to build new homes. Lumber was the most highly publicized material to skyrocket in price. Lumber has come down, but remains elevated, like almost every other material.

It seems nothing can go right when it comes to building supplies. As luck would have it, Beijing is cutting steel production until March 2022 to cut pollution in the city ahead of the winter Olympics. That city alone produces 8% of the world’s steel.

Back in the U.S., labor and land are tight too, which would limit homebuilding even if materials were easy to come by.

And as new homes get more expensive to build, the perceived value of already-built homes goes up too.

Inflation drives up mortgage rates

There is one more element to mention before we discuss how you can get on the right side of inflation. And that’s mortgage rates.

Inflation is bad for rates. That’s because of what happens to a mortgage after you get one. It’s sold off along with other mortgages as a securitized asset to investors, who then collect the interest. These assets are called mortgage backed securities or MBS.

The system itself is genius: it keeps mortgage rates low and lenders able to keep lending.

The drawback is that mortgage rates are determined by markets, just like stocks. A stock can go from $10 to $15 in a week, and in theory, mortgage rates can go from 3.5% to 4% about as fast.

Investors don’t want to hold mortgages with low rates when inflation is rising.

Think of it this way: if you keep your money in an investment that pays you 3%, but if inflation is 5%, you lose money.

For investors to keep buying MBS, the rate of return (your interest rate) must follow inflation rates higher. Not saying that if inflation is 5% that mortgage rates have to be 5% as well – there are other factors involved. But generally, higher inflation means higher mortgage rates.

In the 12 months ending October 2021, the inflation rate was 4.6% excluding volatile food and energy prices, says BLS. After inflation rates near 2% for years, this is a swift increase and may give you a hint as to where mortgage rates are going.

“As costs of goods continue to rise so will mortgage rates,” says Jodalee Tevault, Senior Mortgage Advisor with Fairway Independent Mortgage Corporation, which owns Home.com.

And rising mortgage rates could weigh on home affordability.

“Many buyers are finding that they are priced out of the market right now, especially those without a hefty down payment,” says Joe Pessolano, branch sales manager at Fairway. “Buyers may need to realign their ‘wants’ and be willing to accept a home without all of the bells and whistles.”

But in the end, it’s worth it, says Pessolano.

“Getting into a home – even one that’s a little more basic – is a much better financial strategy versus renting. The ability to build wealth using equity in a home is a necessary step to achieving your dream home.”

How to get inflation working for you, not against you

Inflation doesn’t have to be your enemy.

In fact, you can eliminate parts of it and even leverage it when it comes to housing costs. Here’s how:

Eliminating inflation

Here in the U.S. we have a powerful tool that not all countries have: the 30-year fixed mortgage.

That loan product helps us lock in a principal and interest payment for as long as we have the home and loan. Taxes and insurance can rise, but the bulk of our housing cost is fixed.

Additionally, we eliminate inflation by purchasing a home at today’s cost. Your mortgage balance does not rise each year as home prices around you go up. In fact, your loan balance drops as you make payments.

Not so with rent. Inflation drives up rents, and if you don’t own, you’re fully vulnerable to those increases.

The obvious solution, then, is to buy a home to lock in the home price and your payment forever.

Leveraging inflation

In fact, inflation becomes your friend as a homeowner. In a typical market, your home value “inflates” as prices in the economy rise.

Eventually, you reap the benefits of higher home prices instead of being penalized by them.

But that’s not the only way you’re making inflation work for you.

Your loan balance is effectively diminished as inflation takes hold. According to the BLS inflation calculator, $250,000 today is equal to about $163,000 in 2001 dollars. Someone taking a $163,000 mortgage 20 years ago may have thought it was a lot of money. Now, not so much.

It takes time, and admittedly, some risk. But purchasing a home not only keeps some inflation from happening to you, but lets you benefit from it.

Purchasing a home quickly can help you avoid inflation’s effects

Rising prices for everything from groceries to homes and even mortgage rates will be a fact of life in 2022. The question is, what will you do to minimize its effects?

Purchasing a home in late 2021 or early 2022 is one of the best things you can do to turn inflation from enemy to friend.


Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.

Fairway does not guarantee a mortgage loan will result in equity gains or tax advantages. Any potential benefits from homeownership are based on individual factors. Contact your Fairway loan officer for more information regarding your specific situation.

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