Price inflation increased 5% last month compared to 12 months ago, and its effect on housing could worsen the highly competitive market. The 5% price increase for goods and services, according to the Consumer Price Index, means Americans would need 5% higher wages than one year ago to keep up, says Realtor.com. This could either cool or further heat up the housing market. Realtor.com’s chief economist says it’s hard to tell whether this is a temporary adjustment as the economy reopens or if it’s a permanent change. Either way, she notes Americans have dealt with higher inflation before and stagnant pay could hold many consumers back.
In the short term, rising inflation could further inflame the housing market, leading to an increase in demand as investors turn to real estate. Many believe homes are a safe investment that will grow in value, at a higher rate than that of inflation.
“Real estate is often looked at as a way to protect, if not benefit, from inflation,” says Greg McBride, the chief financial analyst at Bankrate.com. “In times of inflation, money often flows toward hard assets, things in which there is some scarcity. Real estate is one of them. They’re not making any more dirt. There’s a finite amount of land and homes available for sale at one time.”
Inflation also typically leads to higher mortgage rates. So the prospect of rates rising could drive more people into the market who want to take advantage of today’s record-low rates. And more buyers are likely to equal even higher prices.
“That’s an extra spur to stretch a little bit now,” says Lawrence J. White, an economics professor at New York University.
Many buyers want to get in before prices go up even further, says White. “It all feeds into this mentality that ‘I have to do it now,’ which feeds into higher prices.”