When inflation rises it seems like the price of everything goes up. Although low interest rates are a major cause of inflation it still makes home prices rise. Does that mean it is better to buy with cash or get a mortgage when inflation increases. If interest rates rise then buyer’s home purchase power goes down.
Inflation
Annually the average price of housing across the country changes by an average of 7.2%. This includes condos, apartment complexes, single family homes, and townhomes. As of November 2017, this is the largest single year change since 2012. The rise in the average home price in 2017 was 5.8%. If we look at only the US then housing prices would have risen 2.4% compared to the previous year. This is the largest increase in 6 years. Photo by dan_santamaria on Unsplash It is important to note that there are several variables in home prices. This is not an exact science but it does give an idea of how inflation affects home prices. In some cities it is easier to get a loan so rising home prices are more than offset by increasing interest rates. In others the cost of owning a home is very high.
Interest rates
One of the main reasons people buy houses is because they want to retire in the house and buy a second home. It may be worth it to spend 5 years renting before buying a house. If you put in 5 years of rent and sell, you only lose 2 years of mortgage payments. If your cash only adds up to 5 years of rent, then you can live in the house with no mortgage for about 5 years. Once you sell it, you get the appreciation. Remortgage Renting is not always the smartest move, especially in a major urban area with high home values. If you have good credit you may be able to get a lower interest rate by refinancing a mortgage and taking a longer term. The longer you can pay off your mortgage, the lower the rate.
Inflation is Fueled by Low Interest Rates
The Federal Reserve System tries to achieve stable prices by trying to control inflation. That has worked well to lower unemployment and keep inflation under control. Higher inflation means more expensive for items. The effects of inflation are created by getting rid of money in the economy. When people are having more money in their pockets they decide to spend it on new purchases. This causes prices to go up. Keep in mind that inflation only affects you if you have purchased an item at a high rate of inflation. If you bought something with cash then inflation will have little affect on your purchase. How Home Prices Performed in the First Quarter of 2018 The FED recently announced that interest rates will be rising but the rates were not that dramatic.
Conclusion
Although mortgage rates rose in late 2018 and are expected to keep rising in 2019 it will not affect home buyers who get a home loan by using a line of credit. Many first time home buyers get approved for mortgages with up to 50 percent of the down payment in cash. In addition to cash, they can also use a HELOC (Home Equity Lines of Credit). While an interest rate rise of 1% affects HELOCs it may not affect home buyers who do not use a line of credit.
If buyers are trying to offer sellers cheap deals to buy a home in a sellers' market, now may not be the time to buy. The news of a lack of building materials and the number of houses available can make you think if this is the best time to Read more
Southwest Florida is a wonderful place to live, and there are many great towns to choose from. Of the many small towns in the region, here are some of the best ones you should consider living in: Cape Coral, Sanibel Island, Lehigh Acres, Sarasota, Fort Myers Beach, and Naples. These Read more
When a bank greenlights your mortgage application, it will present you with its most favorable interest rate for the loan. This rate is essentially the cost you'll incur for borrowing the money. The rate you receive will depend on various factors such as your down payment, credit score, and the Read more
The Colorado real estate market is starting to calm going into the fall of 2021. It is still a seller's market but we aren't seeing the panic buying from buyers. Colorado no longer has a "selling season" but things always tend to level off in the fall as families work Read more