5 Ways Inflation Is Impacting the 2023 Housing Market (2024)

FAQs

How will inflation affect the housing market? ›

In short, the increase in home prices outpaced inflation by 3.7% overall in 2022. However, between July 2022 and January 2023, inflation outpaced housing prices by 2.5%. As the Federal Reserve interest rate changes, which has meant increases in the past year, so does inflation — and home prices along with it.

Homebuyer.com data analysis indicates that, for first-time home buyers, June 2023 is a good time to buy a house relative to later in the year. This article provides an unbiased look at current mortgage rates, housing market conditions, and market sentiment.

According to the CoreLogic HPI Forecast, home prices are projected to continue their upward trajectory. The forecast indicates an expected month-over-month increase of 0.8% from March 2023 to April 2023 and a year-over-year increase of 4.6% from March 2023 to March 2024.

Home sellers can benefit from inflation in real estate. Home sellers in an inflationary market are rewarded with a higher sale price compared to previous times.

Inflation allows borrowers to pay lenders back with money worth less than when it was originally borrowed, which benefits borrowers. When inflation causes higher prices, the demand for credit increases, raising interest rates, which benefits lenders.

The increase in demand results in higher rental rates, which is great for landlords. Property or rental prices typically increase in an inflationary environment, even though the rise is a unique and distinct housing market study.

Although home prices are expected to improve in the second half of the year, the California median home price is projected to decrease by 5.6 percent to $776,600 in 2023, down from the median price of $822,300 recorded in 2022.

With mortgage rates declining faster than expected, home prices are likely to remain mostly flat throughout 2024. This will be good news for buyers who have been waiting on the sidelines for a good time to enter the market.

Since the start of 2022, the Fed has hiked rates 10 times to combat rising inflation. As of May 2023, the federal funds rate ranges from 5.00% to 5.25%. If this prediction is correct, it won't be surprising to see some of the best high-yield savings accounts offering rates exceeding 4%.

It's also worth noting that while foreclosure rates are up year-over-year, experts do not expect to see a wave of foreclosures in 2023, even where home values are depreciating, as many homeowners have substantial equity due to progressive home price appreciation in recent years.

What are the real estate challenges in 2023? ›

Despite what some may think, 2023 is still a good year to invest in real estate, thanks to advantages like long-term appreciation, steady rental income, and the opportunity to hedge against inflation. Mortgage rates are expected to decline, but the housing market is likely to remain competitive due to low supply.

Do House Prices During Inflation Increase? House prices tend to rise as inflation increases. This isn't surprising: The price of most everything tends to rise when inflation is higher, and housing is no exception.

That said, inflation commonly occurs due to the actions taken by the Federal Reserve. Overall, when more money becomes available, the purchasing power of a dollar decreases, which in turn increases the price of goods and services. Unfortunately, inflation affects most products and services, including real estate.

Real Estate Income

Real estate works well with inflation. This is because, as inflation rises, so do property values, and so does the amount a landlord can charge for rent. This results in the landlord earning a higher rental income over time. This helps to keep pace with the rise in inflation.

Low-income households most stressed by inflation

Prior research suggests that inflation hits low-income households hardest for several reasons. They spend more of their income on necessities such as food, gas and rent—categories with greater-than-average inflation rates—leaving few ways to reduce spending .

Inflation occurs when most prices are rising by some degree across the economy. Debtors gain from inflation because they repay creditors with money that is worth, less in terms of purchasing power. And creditors lose the most, as they lend money when the value was high and get it back when it loses some of the value.

Retirees and People Earning Fixed-Incomes

Inflation causes price levels to rise, lowering the real value of money and your purchasing power. So if inflation leads to a 5% increase in consumer prices, you can afford 5% less than you did earlier unless your wage increases.

After peaking at 6.2% in 2022, we expect inflation to fall to 3.5% for 2023. Over 2024 to 2027, we expect inflation to average just 1.8%—below the Fed's 2% target.

What happens to house prices during recession? ›

Will house prices go down in a recession? While the cost of financing a home typically increases when interest rates are on the rise, home prices themselves may actually decline. “Usually, during a recession or periods of higher interest rates, demand slows and values of homes come down,” says Miller.

If you need to be occupying your home by a certain date to save on rent, it's a much better deal to close at the end of the previous month (for example, January 30) instead of the beginning of the current month (February 1).

"Possibly in 2024, but it will depend on the Fed's decisions about raising rates in the second half of the year," says Fleming. "And even if they do go down, it won't be back to the rates of yesteryear. 6% mortgage rates used to be normal, and that's more reasonable to expect too."

Average home price in the United States: $436,800

The median home sales price is $436,800 as of the first quarter of 2023. That's a 32% increase from 2020, when the median was $329,000.

Key Takeaways. The best age to buy is when you can comfortably afford the payments, tackle any unexpected repairs, and live in the home long enough to cover the costs of buying and selling a home. Legally, you must be at least 18 in most states to buy a home.

Paying off your mortgage early can save you a lot of money in the long run. Even a small extra monthly payment can allow you to own your home sooner. Make sure you have an emergency fund before you put your money toward your loan.

These organizations predict that mortgage rates will decline through the first quarter of 2024. Fannie Mae, Mortgage Bankers Association and National Association of Realtors expect mortgage rates to drop through the first quarter of 2024, by half a percentage point to about nine-tenths of a percentage point.

Even so, Evangelou doesn't expect mortgage rates to go back to 3% anytime soon but notes that even fixed mortgage rates below 6% will still be less than the historical average of roughly 8%. Other experts agree that rates will likely come down in the next few years.

Both estimates are largely in line with fresh projections from officials in March. The Fed penciled in a 5-5.25 percent peak interest rate for 2023, after which officials see rates falling to 4.25-4.5 percent by the end of 2024.

Will the real estate bubble burst in 2023? ›

According to recent data from CoreLogic, the answer may be no, at least for the time being. While there are signs of a slowdown in the housing market's year-over-year growth rate, the overall data and forecasts suggest that a crash is unlikely in 2023.

Fannie Mae expects U.S. home prices to fall -1.2% between Q4 2022 and Q4 2023, and then another -2.2% between Q4 2023 and Q4 2024.

Yes—in two years' time. Both the housing market and millennial demand remain red hot, recent data from the Bank of America suggests. Sixty-seven percent (67%) of millennials said they are likely to purchase a property in the next two years, the 2022 Millennial Home Improvement Survey found.

Dealing with unrealistic sellers

Many sellers compare their houses to those in the neighborhood and want to sell them as quickly as others. It's your responsibility to make them understand the real scenario. This is one of the most common problems that real estate markets face.

While some areas may experience an increase in housing prices, others may experience a decline. In Dallas, TX, housing prices are expected to decrease by 0.1% as of April 2023, followed by a further decline of 0.3% in June 2023, but are projected to increase by 0.7% by March 2024.

Overall, the Florida housing market is likely to remain strong in 2023, with continued demand for homes and steady price growth. However, the market may begin to stabilize as the growth rate slows down, which may lead to more balanced conditions between buyers and sellers.

In Q1 2023, the average going-in cap rate, which is based on the first year of net operating income at the property purchase price, increased 23 basis points to 4.72%, “marking the first significant quarterly deceleration in cap rate expansion since the Fed began its latest round of rate hikes,” according to CBRE.

Despite higher interest rates making financing more expensive than usual, now may be the perfect time to invest in rental real estate because of all of its advantages and long-term potential for wealth generation. Don't let those rates scare you off — there are plenty of compelling reasons this could be a wise move.

How high property prices can damage the economy? ›

Rising property prices can also discourage productive lending, and lead to capital being misallocated. When housing markets boom, banks tend to engage in more mortgage lending. But because lenders face capital constraints, this is often accompanied by reduced lending to businesses.

As the labor market tightened during 2021 and 2022, core inflation rose as the ratio of job vacancies to unemployment increased. This ratio is used to measure wage pressures that then pass through to the prices for goods and services. As workers bargain for better pay, firms begin to increase prices.

However, as high inflation costs press down on buyers, it could depress home values. Although he doesn't expect a major housing market crash, Buehler says he sees home values flattening out as inflation nestles into the housing market.

Investing in farmland as an inflation hedge. There's one more big reason that farmland is an especially compelling investment right now: inflation. Unlike mainstream financial assets, which tend to lose value when consumer prices go up, the value of farmland actually tends to rise when prices rise.

For the most part, inflation is beneficial to landlords because it raises the cost of housing which will raise rent and gross income. This is because the demand for rental housing increases as people become more willing to pay high rents than an unmanageable mortgage in that economic environment.

Inflation can lead to higher asset prices

As this price of things increases with inflation, so too does real estate. Generally speaking, when inflation increases then housing and other real estate asset prices follow suit.

For short term goals where you plan to spend the money within five years it's safer to go for a savings account and not worry too much about inflation. For long term goals you need to keep inflation in mind when you invest. Depending on your circ*mstances, you might or might not want a product that beats inflation.

Now, as inflation burns into consumers' savings, it may cause them to think twice about buying a home. That could cause the real estate market to slow down, or at least pull back from its recent tear.

Looking at the data, inflation-adjusted returns, even factoring in inflation, have almost always been positive in history - meaning that price appreciation for real estate is greater than the inflation rate!

Home prices generally fall during recessions, with home values slipping in four out of the five major recessions between 1980 and 2008.

What causes a housing market crash? ›

“Typically, a housing market crash happens when a housing market bubble bursts,” Lippi explained. “A housing bubble occurs when the demand grows as more buyers continue to enter the market. This causes a shortage in supply, driving prices up. However, this phenomenon doesn't last.

Recessions and housing market crashes may cause your house's value to decrease. However, your set mortgage rates won't lower, meaning your monthly payments will be higher than your home's worth. While many may dip into their savings to help pay the steep bills, others may need outside assistance.

In all scenarios, there is a rapid fall in inflation from February 2023, which is due to the drop out of the high inflation figures in the corresponding months this year. However, inflation will remain well above 2% for the whole of 2023.

Global inflation will fall in 2023 and 2024 amid subpar economic growth. Global growth is projected to fall from an estimated 3.4 percent in 2022 to 2.9 percent in 2023, then rise to 3.1 percent in 2024.

In addition, during recessions, people with access to cash are in a better position to take advantage of investment opportunities that can significantly improve their finances long-term.

In general, prices tend to fall during a recession. This is because people are buying less, and businesses are selling less. However, some items may become more expensive during a recession. For example, food and gas prices may increase if there's an increase in demand or a decrease in supply.

Just because there's a recession doesn't necessarily mean rent prices go down. In fact, during the 2008 recession, it was the exact opposite. In the current rental market, we have seen the rate of increase in rental prices come down, but this only translates to lower rent prices if you're in select markets.

Rental income: Real estate investments can provide a steady stream of rental income, which can also help beat inflation. Rents tend to increase over time, particularly in areas with strong job growth and population growth. This means that rental income can also increase over time, providing a hedge against inflation.