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How Inflation Will Impact Home Values in 2022

Monday, February 7, 2022   /   by Brian Armstrong

How Inflation Will Impact Home Values in 2022

Last week we talked about how the pandemic has and is currently impacting the housing market as it evolves across the country. While we have seen some record numbers for the past couple of years, we are now seeing rising inflation that will affect the housing market and the overall affordability of homes. If you have been considering a move and need to buy or sell real estate, this could seriously impact the outcome of your transaction, so make sure to keep up with these changes as you get closer to making your decision.

Measuring Changes to Inflation

A recent Consumer Price Index (CPI) set out by the U.S. Bureau of Labor Statistics showed that inflation across the last twelve months has risen about 7%, the highest influx since the early 1980s. So, what is CPI, and what exactly does this mean? CPI measures the change of price for consumer goods over a set period. This 7% increase across consumer goods means that if an item cost $1.00 a year ago, that same item would cost $1.07 today. It may sound like a minor difference, but when dealing with hundreds of thousands of dollars, that gap can ultimately cost you thousands. Keep up to date on the changes to inflation here: CPI Home: U.S. Bureau of Labor Statistics 

Who is Impacted the Most?

Generally, inflation is viewed as a good thing for the value of a home you already own. Let’s look at this example: Ceteris paribus or all else equal, if you own a house worth 200,000 last year, the 7% rise in inflation would mean your home’s value would now be worth $214,000. This simplified equation is not quite the case since many other factors affect a home's value aside from inflation, such as supply, demand, etc. But the primary premise behind this concept shows that your current home should see appreciation because of rising inflation. On the flip side, if you are a buyer looking to purchase a home, your dollars are worth “less” than they were last year. You may have been pre-qualified for a home that is worth $350,000, but the homes that fit that price range have likely changed, and you may need to adjust your search criteria to find a home that matches what you can afford.

How Inflation Shifts Demand

Demand for homes is a complex topic, but in a simplified format, it heavily relies on the current prices of homes, available supply of homes, and potential growth in value. Price and availability both have inverse relationships with housing demand. If the price of homes rises drastically in a region or a sudden abundance of housing pops up for sale, demand for those homes will fall. Rising inflation could slow the demand for homes as they continue to appreciate however, the ongoing lack of supply has helped offset the rise of values keeping demand high. Inflation will also impact the disposable income people have to spend on homes. If wages do not increase proportionately to the increases in inflation, many buyers will not be eligible for the type of home they aspire to purchase. Which ultimately can discourage buyers and shrink overall demand for homes.

How Vermont Controls Real Estate Inflation

Looking back, Vermont’s real estate market has seen some tremendous growth. The one caveat is that Vermont never realizes the highs or lows that are experienced across the country, which in some cases has tremendously helped homeowners. Housing inflation is heavily driven by new construction that fuels the economy as more individuals and families flock to an area. Looking back at the Housing bubble burst in 2008, Vermont homeowners were among the least affected by the housing bubble crisis. Why you ask? A state legislature called Act 250. Act 250 puts strict control on the expansion of new housing within Vermont, which protects the state from overbuilding or overexpanding which was ultimately what caused states like Nevada, Colorado, and more to crumble after the financial crisis.

If you want to learn more about the impacts of inflation and whether you should wait to buy or sell your home, contact us at info@strongwillvt.com, and our real estate experts can help you make an informed decision! 

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