If you’ve visited a grocery store or a gas station recently, you know that inflation has become a fact of our current lives. Virtually no aspect of our experiences has gone untouched by inflation and the responses to it, and that includes the housing market.
However, not all aspects of an inflationary market are bad for homeowners or homebuyers. Inflation is a complicated phenomenon, and its effects can vary from market to market, and even for different types of buyers and sellers within a given market. Understanding how inflation is likely to affect your home sale or purchase can help you prepare and take advantage of the opportunities presented by an unusual economy. Learn more about what inflation means for your journey through the Chicagoland real estate market.
What Is Inflation And How Does It Affect Home Prices?
As explained by the Washington Post, inflation is “a decrease in the purchasing power of money, reflected in an increase of the price of goods and services in the economy. So, as inflation ticks up, every dollar you earn loses value and therefore impacts your ability to spend.” In addition to affecting the cost of groceries, cars, and fuel, inflation also tends to drive up the cost of housing — including both home purchase prices and rents. As home prices rise, homeowners with fixed-rate mortgages see increases in home equity without a corresponding increase in housing costs. Renters, by contrast, are likely to see an increase in their housing costs, driving up demand for home purchases, thereby further increasing home prices. Over the last year, inflation has risen at an alarming rate of 8.6%, the fastest rate since 1981, along with unprecedented demand for home purchases and a slowdown in new housing construction. This combination has driven one of the hottest housing markets in years, with homes regularly receiving multiple offers and selling in record time.
To combat these rising prices, the Federal Reserve Board, colloquially known as “the Fed,” increases interest rates during periods when inflation is high, making mortgages more expensive and further depressing homebuyer purchasing power and demand. The most recent increase to the Fed’s base rate, of .75%, marks the most substantial increase since 1994. This contraction of available credit, in theory, reduces demand, thereby permitting prices to stabilize.
How Will Inflation Affect The Chicagoland Real Estate Market?
Although every market is affected by larger pressures such as inflation, credit availability, mortgage interest rates, and other global factors, it remains an essential truth of real estate that the most important factors are hyperlocal. Unlike consumer goods like electronics, toilet paper, or snack foods, real estate prices vary widely by region, and even within a region. As a result, while it’s possible to predict some effects of nationwide inflation, other factors remain in play when looking at your local real estate market.
Inflation And Inventory
Among other factors, inflation makes new construction more expensive, and tends to depress the availability of new homes. In the Chicagoland area, new housing starts rose in May, although inventory in the market remains low compared to demand, suggesting that home prices will continue to rise, although potentially at a slower pace than at the height of last year’s frenetic market.
This relative slowdown in a still-hot market benefits both buyers and sellers. Sellers continue to realize increases in their home values, making real estate a safe hedge against inflationary pressures, particularly in comparison to a volatile stock market. In addition, homeowners who have locked in relatively low interest rates have seen their mortgages become “cheaper” over time as the value of each dollar has decreased. As wages continue to rise in a strong job market, existing homeowners with a fixed cost of living will continue to realize gains in their investment while reducing their housing costs as a proportion of their income.
Buyers, too, can benefit from the current market. A relatively slower pace of sales is making it possible for buyers to think carefully about their home purchases, allowing them time to seek out the best deal on a property that truly fits their needs, rather than feeling pressured to compromise on a home that may not be the right fit. Chicagoland’s desirable location and growing economy make it likely that demand will continue to outstrip supply, meaning that a buyer’s investment in real estate will continue to be a safe investment over time. With rising rents, homeownership remains a secure investment over the long term, one that can help buyers stabilize their household costs, create generational wealth, and, most importantly, find a home in which to create memories and build a life.
Real Estate As An Investment In An Inflationary Period
In an environment of rising interest rates and inflation, real estate tends to be a particularly strong investment, especially when considered over time. The rise in interest rates that accompanies inflation tends to protect investors against a “housing bubble,” in which an increase in risky loans leads to default and a market that is suddenly flooded with inventory. According to a 2020 study by Stanford University, real estate tends to outperform other asset classes during inflationary periods.
However, even in this strong market, expert advice remains critical. The market can vary neighborhood-by-neighborhood, or even block-by-block. For buyers, an agent with local expertise can help to guide you to the best investments, and help you find the home that provides the best investment for your particular needs. For sellers, understanding everything about the market can help you to evaluate the timing of your sale, maximize your profit, and help you to find your next dream home, even as the market continues to shift.
When Home Means More, You Need A Team With More To Offer
Whether you’re buying or selling your Chicagoland home, understanding your market is critical. A hyperlocal agent who understands everything about your market has never been more valuable. That’s why your local Baird & Warner agent is with you at every step of the way, from finding the perfect home to connecting you with local experts in mortgage and title. Whether it’s the beginning of a story or the end of a chapter, we’re here to help.