Soaring inflation and hot real estate markets can leave potential buyers feeling stuck between a rock and a hard place. But there are market conditions that could make buying a home now a smart decision. Inflation is one of them. If you're on the hunt for a new home in 2022, here's how today's high inflation rate will impact you now and in the long run.
Inflation's toll on the market
I bet you've raised an eyebrow at the grocery checkout recently: You've just purchased the same thing you do every week, only this time, it costs more -- a lot more. Gas prices have risen even higher, up 40% year over year (YOY). Among a host of other commodities, used cars and utilities have followed suit. Inflation overall is up at least 7.5% over the past year, and officials believe it will continue to rise in the coming year as money-printing works its way through the economy.
The housing market isn't immune to inflation impacts. Shelter, which takes into account not just home sales but rent as well, has risen 4.4% in the last year on a national average due to inflation. Coupled with last year's 20% increase in median home price and 17% jump in rents, YOY housing costs have gotten really expensive.
No one wants to pay astronomical prices for a home, but we have to conceptualize the bigger picture, as well as the long-term impact of high inflation. The longer inflation stays inflated, the higher the likelihood home price growth will continue to match, if not surpass, the inflation rate. That has big implications on what you can afford.
Let's say you've saved $60,000 for a down payment, meaning you could put up to 20% down on a $300,000 home. Based on today's inflation rate, that $60,000 would be worth $55,500 one year from now. So, you'll need more money to meet the same 20% down payment.
At the same time, the estimated home price growth in 2022 is projected to be 16% YOY, meaning the same $300,000 home would likely be selling closer to $348,000, which would require $69,600 to meet the 20% down payment. In other words, the longer you wait, the less buying power you have.
How to buy in an inflationary real estate market
Fixed-rate mortgages are a wonderful tool in today's inflationary environment, especially with the talk of interest-rate increases over the coming year. When a home is purchased at today's prices, you are essentially locked into a fixed payment -- at a relatively low price, despite other costs increasing -- allowing your dollars to go further.
Buying a home sooner than later is likely the best way to spend less money, as counterintuitive as it is. The price tag may seem steep today, but if things continue on their current path, the sticker shock will likely look like a steal of a deal in the future. As with any investment or market, you will need to do your research to make sure that you can support the payments and are ready to buy a home. But if it meets the initial review, you likely won't regret your decision in the coming years.