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Interest Rates and Inflation Are Affecting Homebuyers and Sellers

Thursday, May 26, 2022   /   by Brian Armstrong

Interest Rates and Inflation Are Affecting Homebuyers and Sellers

If you have been watching the news over the past several weeks, you have likely seen analysts discussing inflation and interest rates. Both mechanisms have a strong pull on the U.S. economy, and if you are looking to buy or sell real estate, understanding what the numbers are indicating is key. Read on as we dive into what is happening with our current economy and what impacts Vermonters (or future Vermonters) will face! Please keep in mind we are not financial advisors, and you should always speak to a finance professional before making any decisions to understand the appropriate solution(s) specific to you.

The Inflating Economy

Over the last year, we have seen a tremendous rise in inflation. Inflation, in simple terms, is a year-over-year calculation of everyday goods like food, gas, electricity, etc. In the past 12 months, we have seen a huge jump coming to a whopping 8.3% increase. With the cost of living rising across the U.S., homebuyers feel the effects in their pockets. Inflation has impacted the value of homes, making the barrier of entry much higher for new homebuyers. Some reports indicate that a 10% down payment on a home could be more than 50% of a household's annual income! On the flip side, homeowners looking to sell may be benefitting from the current inflation due to the increase in home values. However, considering that prices have risen all around, sellers can still run into challenges when looking to buy their next home. 

Interest Rates Incoming

During the height of the pandemic, interest rates hit an all-time low, but they are now rising again. You may be wondering why interest rates are rising again. The Federal Reserve! The Federal Reserve monitors financial activity and uses indicators like rising inflation to manage spikes in the economy that could present economic challenges. To control the rise in inflation, the Federal Reserve can respond by raising interest rates, which ultimately increases the cost of borrowing. By expanding the borrowing rate, spending will slow down i.e., less demand for goods such as homes. Keeping supply the same coupled with less demand, economic models show prices will decline back to equilibrium. 

The Impact on Housing

With the low mortgage rates over the last couple of years, we saw an immense number of transactions and demand that far outpaced supply. Multiple offers on homes drove sold prices well over the original asking price, so where does that leave us today? Inflation is higher, borrowing money from financial institutions has become more costly, and some buyers are indicating that they may pause their search. In part, the slowing of home sales shows that the response to the rise in interest rates works, but the downside is that many people looking to buy or sell may have challenges ahead. Keep in mind that homes will still be bought and sold, but we won't have the steady growth market that we have seen for the past decade. 

Vermont's Outlook 

Most of the above information is a general outlook of the nation, but much of it will impact Vermont the same way. Luckily for those of us in (or soon to be in) The Green Mountain State can rest easy knowing that Vermont doesn't typically see the peaks or valleys of significant economic changes. Vermont has some strict policies on the state's housing industry that helps buffer drastic market adjustments. While this can limit the potential upside from a booming economy, we also generally get a reprieve from market downturns. 

If you have more questions about your home's market value or your current purchasing options, please reach out to us at 802-735-2167 or send an email to info@strongwillvt.com


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Strong Will Real Estate at KW Vermont
Brian Armstrong
68 Randall St
South Burlington, VT 05403

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