5 Ways Inflation Is Impacting the 2023 Housing Market

The U.S. housing market is undergoing a rebalancing. Visit HomeLight’s Housing Trends Hub for information on how to navigate a shifting market — whether you’re a seller, buyer, or homeowner.

Homeowners across the nation are feeling inflation ratchet up financial pressure. As costs rise, you may be wondering whether you should buy, sell, or hang on until the economy cools down.

Before you make any move, it’s important to examine the current housing market and listen to what the experts are saying about inflation’s impact on homes. This is an in-depth look at how inflation is affecting the housing market, and what it means for you.

How bad is the inflation rate?

Inflation soared in 2022. According to the U.S. Bureau of Labor Statistics, June’s inflation rate hit a more than 40-year high, spiking to 9.1%. Although inflation inched lower, to around 7% at the start of 2023, it still towers over consumer prices from just a few years ago. As Coin News’ U.S. Inflation Calculator highlights, inflation rates stood at a mere 1.4% in 2020 and crouched around 0.7% in 2015. Overall, the inflation rate appears to be creeping downward, but it has a long way to go before it falls back to recent norms.

5 ways inflation is affecting the housing market

As inflation weighs heavy on both home buyers’ and sellers’ minds, the housing market is shifting. And the disruptions that spring out of the overheated market could impact your next home transaction. Here are five ways inflation is affecting the housing market:

1. Home prices could decline

With living costs skyrocketing, it’s natural to think housing prices will keep climbing. However, housing prices smashed records earlier this year – with the median price of existing homes ballooning to more than $400,000 in May. Now, as buyers see inflation eating into their wallets, they may start backing away from home sales. At the same time, mortgage rates are growing. Both of these factors could dampen housing demand and deflate prices.

Kurt Beuhler, a top real estate agent with more than 30 years of experience selling in the Dallas-Fort Worth area, says: “You know it was stupid. It got to the point where, on a $400,000 house, we would see $50,000 to $75,000 over list price on offers. And that’s setting benchmarks up there where the price is so high, the affordability indexed it, and buyers couldn’t afford to even purchase at that price point.”

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2. Home values may waver

Homes have appreciated at rapid rates in the last few years. According to a Statista report, house values across all 50 states and D.C. rose from 2020 to 2021. The same study saw the average appreciation for single-family homes in multiple states spike to more than 27 percent in a single year. 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.

“We’re almost on the edge of a neutral marketplace, rather than a seller’s marketplace,” he explains. “So, yeah, there are going to be some declining prices.”

3. Mortgage rates should march higher

In order to curb inflation, the Federal Reserve is raising interest rates. And even though the Federal Reserve doesn’t directly determine mortgage rates, its moves often indirectly sway mortgage rates.

Mortgage rates climbed in 2022. According to a Fortune Magazine report, mortgage rates jumped more than 50% in six months in response to Fed rate hikes, and sit around 6.5% at the start of 2023.

Going forward, those mortgage rates may jump higher, or they may simmer down. In either case, it’s likely that they won’t drop back to pre-inflation levels in the near future.

4. Construction costs may rise

When inflation is high, the costs of materials also increase. That means it may become especially expensive for construction teams to build new homes or renovate existing homes. Ultimately, those high costs could spill into the housing market and lift home prices for new builds.

“When inflation affects the marketplace, it also affects all the costs of goods to build a house,” points out Buehler. “So we may see builders holding higher prices because it’s costing them more to build a house.”

5. Housing sales could slow down

Houses have been selling at record rates in recent years. According to Statista data, last year’s home sales raced to the highest numbers since 2006. 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.

“We’ve been in a seller’s market for the last 10 years, and real estate cycles,” says Buehler. “We’re going to cycle into a neutral marketplace, I think, and I’m sure in some marketplaces it’s going to be a buyer’s market.”

What if I want to sell my home during inflation?

With inflation beating down on the housing market, you’re probably wondering if you should sell your home now or wait until the economy flattens out. Here are a few tips if you’re thinking about selling your home during the current spike in inflation:

• Assess your selling motives: Before leaping into an uncertain market, Buehler suggests sellers think about their lifestyles and decide if they’re ready to sell right away. He says to ask, “What do they want out of the sale of the house? And why are they selling?” If you realize you’re serious about selling after doing a little soul searching, he says you should start conducting research now and connect with a real estate agent to discuss your home’s value.

• Sell soon to cash in: Because housing prices may shrink in the near future, you may want to pull the trigger on sales soon to cash in on high prices. Buehler explains, “We kind of have a window here before interest rates go up. When interest rates go up, buyers have to reduce what they buy a home for in order to have that same payment…We still have an opportunity for sellers to obtain the high prices.”

• Do your research first: Even though inflation is impacting the entire market, it may affect some regional housing markets more than others. That’s why it’s a good idea for you to dig into your individual housing market’s specifics before you sell your home. One way to do this is to find a real estate agent to conduct a comparative market analysis for your home. This is a research tool agents use to examine a property’s characteristics, as well as nearby sales, and set a competitive price for your house.
• Update your home: As the housing market tightens, it could become more and more important to prep your home before a sale. That may include making renovations, identifying which fixes will land you the highest ROI, and staging properly. Buehler says: “The homes that are not updated are the ones that are sitting and doing price reductions. If they’re not updated and they’re not pretty, they’re not getting hit at all. Buyers are not just buying anything that comes on the market anymore.”

What if I want to buy a home during inflation?

As a buyer, it may feel like inflation is pulling you in a hundred different directions at once. Inflation may dampen housing demand and cool down prices. At the same time, you’re probably feeling the pain of high living costs and rising mortgage rates. If you’re thinking about buying a home amidst inflation, here are a few tips:

• Keep an eye out for new opportunities: If inflation limits demand, buyers may see competition within the housing market lighten up. That means it could be your chance to buy at prices you couldn’t before. Buehler says he’s seeing buyers who were once shut out of the market starting to re-enter as demand calms down.

“I think they’re so determined to buy a house and they’re frustrated that they couldn’t buy, but now they can,” he says. “So we’re excited about the buyer side of the business now.”

• Consider all costs: It’s important to remember that inflation doesn’t just impact a home’s final sale price. It can also hike up everyday living costs, closing costs, down payments, and all of the other expenses that are built into a sale. That’s why it’s important to look into all of the costs of buying a home and to budget before jumping into a deal.

• Find an agent who’s a financing wizard: As mortgage rates rise, buyers may be able to find payment options that ease up the buying process. For instance, if rates jump dramatically, it may be worth looking into adjustable-rate mortgages (ARMs). Buehler says top real estate agents will need to start working closely with financing companies to help lift pressure off of buyers.

“When people are concerned about payments, there are ways to help them with those payments,” notes Buehler. “[For agents] that’s figuring out, and being very good at, the finances.”

Overall, if you’re worried about financing, it’s worth asking your buyer’s agent or a loan officer about all of your options.

Inflation is morphing opportunities in the housing market

Inflation is changing the face of the market. As financial pressure increases, it may impact everything from prices and home values to home sales, construction costs, and more.

No matter how inflation affects the housing market, it will shuffle choices and opportunities for buyers and sellers. The easiest way to spot the best opportunities for your home transaction is to connect with an agent who understands the ins and outs of your local housing market. Want to get started? HomeLight’s free Agent Match platform can connect you with a top-performing real estate agent in your area.

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