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The Effect of Inflation on Housing Prices

by Amber Keefer

Inflation affects housing prices, particularly over the long term. Although rising home prices can make it look like the real estate market is improving, prices, generally, rise due to the impact of inflation. Homes that appear to appreciate in value with time actually remain pretty much the same when you consider the effect of inflation, explains Phil Pustejovsky, author of “How to Be A Real Estate Investor,” in a guest post for RealEstate.com.

Rising Interest Rates

When inflation is high, the cost of buying a home increases as lenders raise interest rates to curb inflation, points out Greg McBride, senior financial analyst for Bankrate.com. As the dollar loses some of its purchasing power with a rise in inflation, any savings you have put aside for a down payment loses value as well. If you are thinking about buying a house when the inflation rate is high, chances are you will be facing rising home prices and higher interest rates, which increase the cost of borrowing.

Effect of Supply and Demand

When the Federal Reserve lowers the federal funds rate, that in turn lowers interest rates, making it cheaper for consumers to borrow. Low interest rates make buying a home more affordable, attracting buyers. As an example, competition for a limited supply of homes on the housing market due to low interest rates increased home prices across the nation, according to a 2013 Bloomberg report. But as homes get higher prices, more sellers are putting their homes on the market, increasing the supply. Historically, as market inventory increases, housing prices tend to level off and remain steady.

Inflationary Effects on New Construction

While the construction of new housing is a major indicator of the state of the nation's economy, when the inflation rate rises, so does the cost of new construction. Not only the cost of materials rise, but labor costs also rise when inflation is high, notes executives at Leopardo Cos., one of the nation’s largest construction firms, in a column for Commercial Property Executive. When new construction in the country slows, it reduces the supply of homes, which can push up the prices on existing homes.

Effect of Higher Rents

Owners of rental properties take inflation into account when determining the rents they charge, in much the same way that lenders consider how the inflation rate will affect interest rates over time before giving out a loan. An article published by the Real Estate Center at Texas A&M University discusses American economist Irving Fisher's theory that looks at the relationship between interest rates and inflation rates and how they apply to housing rents. As landlords increase rents to keep pace with inflation, higher rents lead to higher home prices. Consequently, since one method of assessing the value of a property considers its income-producing potential, higher rents may increase a home's value.

About the Author

While business skills are essential in any career field today, my MBA degree in combination with more than 25 years of employment experience in the fields of human services, higher education, health care, continuing care services for senior adults, and freelance writing have aided me in developing a number of strategic strengths including: · Commitment to providing the highest quality of written work · Effective communication and writing skills · Reliability and high standards for writing · Initiative and ability to thoroughly research a topic {{}}

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