How Does Inflation Affect The Real Estate Market?

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 and home prices
Inflation and home prices


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.

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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.


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.

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