Housing Inflation

Personal Money Planning |

Housing Inflation

By Gary Silverman, CFP®

Listen to the article here: https://youtu.be/XL877iohO_s

You've probably heard that home prices are rising. If you're selling, this is excellent news; if you're purchasing, it's bad news. It is now commonplace for property prices to rise. We have a little inflation, and economists tell me that a little inflation is generally beneficial. I'm not sure if this is true or not, but it is believed by many Ph.D. types, so let's believe it for the time being.

Nonetheless, the recent inflation, particularly the housing inflation, is becoming excessive. It wasn't so long ago that housing prices were falling. Drops of 50% were seen in a number of areas around the country. You may recall the Financial Crisis (also known as the Great Recession), which was not pleasant for individuals with adjustable-rate mortgages or who needed to relocate.

For many years prior to it, the housing market was incredibly strong—especially in the areas of the country where prices would plummet the most. Oh, see, the housing market has rebounded. And this time, the absurdity can be found in almost every neighborhood across the country.

If you look at charts of home prices vs. general inflation or housing price vs. rental cost ratios, things look much scarier than they did in the years leading up to the last housing crash. But don't worry, I'm not expecting a real estate bust. It might happen, and I might get around to predicting that later, but that isn't the point of my writing today.

Today, we use the same data to argue that it is getting harder for people to own homes. The most obvious explanation is the one that I just mentioned: According to the National Association of Realtors, housing prices have increased by almost 50% since January 2018.

That's not all, though. According to Freddie Mac, interest rates (which are crucial for anyone who isn't paying cash for a home) have increased by a full percentage point in the same time frame, representing a 70% increase. To top it off, rising home prices up result in higher down payment requirements.

Higher prices, higher interest, more money needed for a down payment—This triple whammy has resulted in a home affordability problem, which is in striking contrast to the preceding decade's situation. This is a problem.

Will rising wages keep up with the cost of living? Will interest rates drop again? Will home prices fall or at least remain stable? Will this all happen gradually, or as a result of a new crisis? As I already stated, I am not making any predictions. However, when creating plans for your financial future, you should keep the possibilities in mind.

May Ukraine stay free.

Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing.