Oncoming Inflation Worries Homebuyers

HOUSTON – (By Dale King, Realty News Report) Inflation is a nasty little critter with a voracious capacity to be a game changer, a deal breaker or a dream destroyer – particularly when it comes to buying or selling a home.

Responding to a recent Redfin-commissioned survey of Americans who are seriously thinking about either purchasing or selling a home in the next 12 months, 29 percent said they are delaying homebuying plans due to inflation. Twenty-four percent are hastening their homebuying effort while 11 percent are calling it quits.

Ken H. Johnson

“Ownership has long been seen as a hedge against rising rents, and rents are particularly sensitive to inflation,” said Ken H. Johnson, Ph.D., an economist for Executive Education within the Florida Atlantic University College of Business  in Boca Raton, Fla.

“Thus, given the significant level of current inflation, it is not surprising to see a considerable number of the survey respondents indicate that they are accelerating their plans to own.”

Meanwhile, 10 percent of respondents say inflation is causing them to move up their plan to slap a “For Sale” sign on the lawn, 7 percent report delaying their selling plans and 3 percent have decided to throw in the towel.

“The way Americans interpret news about rising prices can have a variety of effects on their financial decisions, including homebuying,” said Daryl Fairweather, chief economist at Redfin, the technology-powered real estate brokerage.

“Some people may delay buying because they’re worried that with prices rising on everything from food to fuel, now is not the right time to make a huge purchase,” says the Redfin report. “But others might move faster to find a house because they’re worried home prices and rent prices will increase even more, and they want to lock in a fixed payment.”

Rising prices are “a double-edged sword,” said the FAU professor. “Rising home prices that take place when a metropolitan area is at or near the peak in its current housing cycle is not a good thing.  Buying at the peak of the market/cycle extends the holding period before an owner can see reasonable financial returns.”

“Also, it often creates a situation where the owner is underwater (the value of the property is less than the property’s mortgage balance), trapping the owner into a longer holding period and often having to forgo professional opportunities that might become available, but necessitate a move.”

“Rising prices at the bottom of a housing cycle are, generally speaking, a good thing,” said Johnson. “They are a sign that a housing market is turning around and typically signal to potential homeowners that it is time to buy.”

“The real question about rising or falling property prices, however, is how far they deviate from an area’s long-term pricing trend,” he said. “Significant variation in prices from the local property pricing trend make it very difficult for housing to serve as a wealth creation asset.  With significant swings in housing prices, buyers must time their property purchases to avoid buying near the peak of a housing cycle as these purchases significantly delay wealth creation from ownership.”

“For buyers fortunate enough to purchase near the bottom of a housing cycle, wealth creation from ownership comes easily, but cycle bottoms are typically years apart.  The best case for ownership to create wealth is for housing cycles’ peaks and bottoms not to deviate noticeably from an area’s long-term pricing trend for housing.  In this scenario, ownership creates wealth from the trend in property appreciation with little worry about swings/deviations from this trend.”

The Redfin survey results come amid reports that inflation is at its highest level in nearly 40 years, with consumer prices jumping 6.8 percent in November from a year earlier. Increasing prices for gas and other energy sources are driving the inflation surge. Home sales are expected to remain brisk in 2022.

Seventy-three percent of survey respondents said rising gas prices are impacting decisions about their homebuying plans or their commute. Thirty-five percent said they plan to drive less or drive a more efficient vehicle because of rising gas prices, while 25 percent plan to shorten their commutes. Twenty-one percent said they plan to buy a cheaper home.

“Different homebuyers react to high fuel prices in different ways, depending on their circumstances,” said Redfin Deputy Chief Economist Taylor Marr. “Some people will pay a premium to shorten their commute, while others will opt for a more affordable home to make up for expensive gas or a new – but more fuel-efficient – vehicle.”

Jan. 7, 2022 Realty News Report Copyright 2022

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File: Oncoming Inflation Worries Homebuyers

Feature photo credit: Ralph Bivins, Realty News Report Copyright 2022

File: (2) Redfin. Oncoming Inflation Worries Homebuyers. Ken H. Johnson. Taylor Marr


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