Inflation is making almost everything more expensive, including buying and selling a home.
Skyrocketing home values give sellers a lot of options. Competition is so high that many sellers can simply find a real estate agent, list their property, and let the bidding war begin.
Of course, the dynamic changes when sellers turn around and start shopping for their next home. Navigating this white-hot market can be overwhelming, especially for first-time buyers in hot markets like Pennsylvania or Illinois.
Here's what home buyers and sellers can expect when they move during this period of high inflation.
1. Buyers Won't Have a Lot of Options
A housing shortage is one of the big factors causing today’s tight market, and inflation is a big driver of the shortage. The rising costs of building materials and labor have forced builders to delay and cut back on projects. Many experts also believe we’re still recovering from years of underbuilding that started around the 2008 financial crisis. Even if you’re able to buy, you won’t have as many options.
2. Skyrocketing Home Prices May Erode Your Purchasing Power
The historic bump in home prices since the pandemic has been great for sellers, but not for buyers. Today, $400,000 may get you a modest starter home instead of a sprawling six-bedroom house with a double lot.
3. It May Be More Difficult and Expensive to Secure a Mortgage
The Federal Reserve has already begun raising interest rates to combat inflation, and most experts expect a few more rate hikes before the end of the year. This has already resulted in higher mortgage rates.
As interest rates continue to climb, banks may charge higher rates and offer fewer loans, making it harder to get a mortgage. If you get approved, a higher interest rate means you’ll pay a lot more over the life of your loan than you would have a year ago.
4. You May Decide to Keep Renting
When buyers realize how much rising home prices and increased mortgage rates have reduced their purchasing power, many may decide to wait out the market and keep renting for a few more years. This is a wise decision if you think the market will cool in the near future. It's a likely prospect if the Federal Reserve continues to raise interest rates.
5. But Inflation Drives Up Rent, Too
As more Americans are locked out of the housing market, the number of people competing for rental units will increase. This, in turn, will drive up rent. The average rent price jumped as high as 40% in some U.S. cities in 2021. In many hot markets, bidding wars over rental units are now commonplace.
6. Sellers May Be in for a Rude Awakening
Rapidly increasing home prices are great for sellers until they have to buy their next home. Although it’s very likely they’ll sell their present home for well above asking price, that euphoria may evaporate when it’s time to look for a new home. The profit they just made is going to buy a lot less house.
7. Buyers May Take Unwise Risks
In this white-hot seller’s market, sellers have all the leverage, and it’s common for buyers to lose several bidding wars before finally getting a home. Many buyers will become desperate and make radical concessions, waiving basic protections like a home inspection just to close on a house.
Waiving a home inspection means hidden problems will go undiscovered until after the sale, and the buyer may have no legal recourse. Many buyers will end up stuck with homes that have foundation problems, leaky roofs, or worse.
8. Home Values May Decrease Soon
Most experts believe the housing market is at or near a peak. If you buy in the near future, you could see your home value decline in the weeks or months after closing. Almost no one is projecting a 2008-style crash in home values, but it could be unsettling for many buyers to watch their new asset depreciate immediately.
9. The Vacation Rental Market May Suffer
In times of high inflation, consumers may cut back on travel and vacations. Investors who own short-term rentals, marketed on Airbnb and other sites, may be in for a rough ride. If enough of those homes sell, it could alleviate some of the housing shortage in areas with high levels of tourism.
10. The Future of Remote Work Will Influence the Housing Market
The rise of remote work during the pandemic was a huge factor in the hot housing market because many white-collar workers relocated to larger houses that could support a home office. The migration to suburban and rural markets raised home prices in some of those markets — a phenomenon that could be reversed if employers call employees back to in-person work.
11. Your Down Payment Is Going to Increase
A down payment isn’t a flat sum — it’s a percentage, usually around 20%. As home prices climb, so will the average down payment amount.
If home prices increased 20% in the past year, a home that was $500,000 last year would be worth $600,000 today. As a result, a 20% down payment on that home would increase from $100,000 to $120,000.
Getting that much cash is tough, especially when buyers also have to account for other expenses, such as earnest money and moving fees.
12. Higher Mortgage Rates May Cool the Market
Higher mortgage rates may mean fewer home buyers will be approved for a loan. Fewer home buyers means less competition for homes that are on the market. Less competition translates into slower home appreciation.
13. ARM Mortgages May Increase in Popularity
An adjustable-rate mortgage (ARM) allows home buyers to lock in a lower-than-average rate for a certain number of years before the rate increases. For buyers who are betting that home values will continue to skyrocket and are determined to buy into the market now, this type of mortgage may be an acceptable compromise, and banks may start offering them in greater numbers.
14. You Might Be Able to Lock in a Low Mortgage Rate
Many home buyers may not know that once your mortgage application is approved, many lenders will allow you to lock in a rate any time during a 30- to 60-day period following approval. Although interest rates are pretty stable overall, they do experience small short-term ups and downs. Observant buyers who closely monitor rates could benefit if they manage to lock in a low rate during a downturn.
15. Home Maintenance Services May Be More Expensive
Inflation is increasing costs across the board, and there’s a shortage of skilled tradespeople because the pandemic slowed the already sluggish recruitment of apprentices. Once you move into a new home, fees for plumbing, landscaping, chimney cleaning, HVAC servicing, and electricians are going to cost more than they did a few years ago.
16. Doing It Yourself Could Be More Expensive, Too
Most homes need some work before they hit the market. Fees for general contractors are rising, which could cause many homeowners to take on DIY projects. Unfortunately, material costs are rising too. Lumber prices are going to hit the wallet of handy homeowners hard, discouraging them from building that new addition or modernizing a guest bathroom.
17. DIY Projects Might Be Too Expensive to Try at All
Some studies suggest that up to 80% of homeowners make a minor or major mistake on their home renovation projects. That means there’s a good chance you’re going to need a professional to fix or redo your work.
If they have to rewire your home, tear out drywall hung incorrectly, or reinstall your bathroom plumbing from scratch, you’re going to end up paying a lot more than if you’d hired a pro from the start. If you’re doing renovations to get your home ready for the market, it could also result in long delays while you wait for your work to be repaired
18. You Might Wait to Upgrade Appliances
Home appliance prices have risen almost as much as home values. The price of laundry equipment rose nearly 20% over the past year, and other appliances have become more expensive too, albeit at a lower year-over-year rate of around 5%.
Considering that other cost increases are also burdening homeowners, appliance increases will likely cause many homeowners to wait another year or two before upgrading.
19. Inflation May Push You To Buy High-End Appliances
High-end appliances have also increased in price but at a much lower percentage than their more affordable counterparts. If you absolutely need to buy a new refrigerator, a high-end stainless steel model might offer a lot more value than an overpriced cheap one.
20. Prepare for Delays
If you hire a contractor, don’t expect the crew to show up next Monday. Supply chain problems have made it difficult to acquire materials, and many contractors are scheduling jobs months in advance. Once the work is underway, trouble finding the necessary workers or materials could cause delays of weeks or even months. Homeowners looking to sell need to plan far in advance and execute those plans as soon as possible.
21. Get Multiple Contractor Bids
Everyone’s charging higher prices, but prices aren't increasing at the same rate everywhere. Some contractors may only raise prices in proportion to rising costs. Others may raise them even more to take advantage of a competitive market.
For homeowners, it's more important to comparison shop than ever before. Get estimates from at least three contractors for any project you’re planning.
22. Contractors May Be More Open to Negotiations
When you’re getting an estimate, you may be able to negotiate a lower fee. Similarly, you might be able to get a lower price on materials or appliances with some savvy bargaining. Just like higher mortgage rates may lock many buyers out of the housing market, more expensive appliances and construction materials may mean fewer sales. If the market’s slowed down, the supplier may be willing to cut you a deal.