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Should You Buy a Home During Inflation?

During inflation, the cost of buying a home can increase substantially. This makes it harder for first-time homebuyers to find affordable housing solutions and forces all potential buyers to consider whether or not it makes sense to navigate current market conditions at all.

Despite the fact that higher interest rates and home prices can provide additional hurdles to buying a home, it’s not necessarily impossible or unwise to buy a house during inflation—it just means you may need to take a few additional steps to ensure that your new home is not only affordable, but also a smart investment.

In this post we’ll explore the reasons why inflation affects housing costs and offer effective ways to decrease the impact of inflation on your own home purchase today, and for years to come.

How Does Inflation Affect Mortgage Rates?

Interest rates for loans are influenced by the overnight lending rates set by the Federal Reserve. Banks are required to keep an amount of cash reserves every day (called overnight deposits) in the Federal Reserve. Other banks can borrow from this pool of overnight deposits to meet their daily cash flow requirements, like extending loans, at the interest rate set by the Federal Reserve. Banks can’t charge interest rates that are lower than what they themselves are paying, so the Federal Reserve rates work to set the bar for general market rates.

When the federal government wants to slow inflation, one way it can do so is by raising overnight lending interest rates, which in turn raises consumer interest rates and slows consumer spending. The Federal Reserve raised interest rates numerous times in the past few years to successfully cool down the economy and stop runaway inflation, which since May 2023 has returned to normal levels.

How Does Inflation Affect Home Prices?

While capping inflation by raising interest rates often causes mortgage rates to rise (and therefore the cost of homeownership), inflation in and of itself can also affect home prices. One of the main reasons for this is the rising costs of building materials. As Entrepreneur magazine explains, “in inflationary times, fewer new builds and other development plans can get off the ground due to rising costs of construction-related products and services. This leads to plummeting property inventory levels, keeping demand ratios high and thus increasing [home] prices.”

In Missouri and Arkansas, rising home prices sometimes even outpace national averages. In fact, Fayetteville-Springdale-Rogers is one of the 15 metropolitan areas in the country with the largest recent increases of home values.

However, inflation can eventually have the converse effect on home prices. As interest rates and home prices rise, demand for homes can cool off, causing home prices to stabilize or even eventually come down modestly in some areas. The National Association of Realtors predicts that in 2023 home prices will remain neutral, after an over 35% rise since 2020.

10 Tips for Buying a Home When Inflation is High

1. Have a savings cushion.

Spending above your budget without the safety net of savings can lead to financial troubles, putting your home at risk. That’s why it’s so important to have an emergency fund set aside to cover homeownership expenses that may arise in the first few years of owning your home.

An emergency fund can not only cover surprise repairs and bills, but it can also help float you through uncertain economic times, covering mortgage payments and other living expenses should you lose your job or face other financial hardships.

2. Determine if it really is the right time to buy.

While it used to be the case that buying a home was more affordable than renting in most parts of the country, that isn’t always the case today with higher home prices and interest rates. You may want to consider taking a year or two to grow your savings and improve your credit, before jumping into an unaffordable housing situation.

And if you are already a homeowner and feel like your home isn’t meeting your needs, it may make more sense to renovate your current home—especially if your current mortgage rate is much lower than today’s market rates.

3. Be prepared to act quickly.

Often, federal interest rate hikes come in a series, and you can never be entirely sure when the last rate hike will happen. For instance, while interest rates went unchanged in June 2023, the Federal Open Market Committee left open the possibility of raising them two more times in 2023 in their Summary of Economic Projections.

If you’re about to buy a home, it may make sense to act quickly and lock in your interest rate if more interest rate increases are on the horizon. This can save you thousands of dollars over the course of your loan. For example, even a .25% mortgage rate increase, which can be about $50 a month more on a typical monthly mortgage payment, can cost you $18,000 or more over the life of a 30-year mortgage.

4. But don’t rush into a bad housing situation.

Being prepared to act quickly needs to be balanced with sufficient research and consideration. Locking in your mortgage rate for 30, 45, or 60 days can buy you the time to carefully weigh your options and find the right home for your needs.

Additionally, in today’s market it is best to avoid using risky tactics to secure a home like offering well-above asking or foregoing contingencies like home inspections. The last thing you need in a time of high inflation is an expensive repair bill in your first year of home ownership for something that could have been addressed before closing. And fewer than 1 in 3 homes in Missouri and 1 in 5 homes in Arkansas are currently selling above list price—down 10-16% over last year.

5. Investigate other neighborhoods or consider smaller homes.

In order to find a home that meets your budget, you may need to expand your search into other, more affordable neighborhoods. If you are able to work from home, you may be able to save money by avoiding more expensive commuter-friendly neighborhoods or looking outside of city limits. If you’d like to live closer to your town center, speak to your real estate agent about up-and-coming areas where home prices are expected to rise, rather than pay top dollar to live in the most desirable neighborhood.

If you had planned to purchase a larger home to grow into, consider finding a home that meets your needs today, and planning to scale up down the road. Finding a more affordable, smaller home can significantly reduce your housing costs, while still allowing you to build equity in real estate that can be later used for your down payment on a future, larger home. And interest rates or home prices may be more reasonable in coming years.

6. Consider a larger down payment.

Interest rates aren’t just dictated by market conditions; your credit score and down payment can also affect what you’ll pay. Speak to your lender to see if increasing your down payment to closer to 20% can lower your interest rate. In some cases, even marginally increasing your down payment could make a difference in your available interest rate.

Beyond potentially getting a better interest rate, keep in mind that the less you borrow, the lower your monthly payments will be, and the less you’ll pay in overall interest. You can use a mortgage calculator to help you compare your monthly payments and total interest costs with different down payment amounts, to see how much you could potentially save.

If you don’t have the cash resources to put more money down, it may also be possible to get special down payment assistance grants—talk to your lender about local assistance opportunities.

7. Look into low down-payment options.

Maybe increasing your down payment during a time of high inflation isn’t in the cards for you. Fortunately, there are many government-backed loan programs available to homebuyers in Missouri and Arkansas that allow you to purchase your home with much less than 20% down, while still offering affordable interest rates. And the good news is that these loan programs are available through your local bank. These include:

  • VA Loans for veterans and active military service members, offered in partnership with the Department of Veteran’s Affairs and requiring no down payment.
  • USDA Rural Development Loans for homebuyers in low-population areas, offered in partnership with the US Department of Agriculture and also requiring no down payment. (Read more in What is a Rural Development Loan and How Do I Get One?)
  • FHA Loans, offered in partnership with the Federal Housing Administration, allowing for down payments as low as 3.5%.

8. Work on your credit score.

As we mentioned above, good credit can also help you get the best available mortgage rate. Before applying for a home loan, it may make sense to take some steps to improve your credit score. Short-term strategies include:

  • Paying down debt to decrease your debt-to-income ratio.
  • Paying bills on time to improve your payment history.
  • Paying down credit card balances to reduce your credit utilization rate.
Improving credit can help lower your interest rate but be aware that other activities can have the reverse affect. Be sure not to apply for any new loans or credit cards until after your mortgage has closed and avoid putting excessive purchases on your credit card (even if you are excited to start buying things for your new home!).

Learn more about your options for applying for a mortgage with bad credit.

9. Work with professionals who know the market.

A knowledgeable real estate agent can help you navigate the current market—whatever the conditions may be. They will know when a home is a good buy, when to make an offer, and when it’s better to walk away. They also know local housing and pricing trends, which can help guide your decision to buy now or wait.

Working with an experienced mortgage lender can be equally beneficial. Your lender can help you find the right mortgage product to meet your budget needs, or suggest a strategy on how to mitigate high interest rates. 

10. Strategize for when mortgage rates may go down.

If you expect mortgage rates to go down in future years, there are few ways to reduce your out-of-pocket interest costs today and down the line. Consult with your lender to see if either of the following options may make sense for you:

  • Consider an Adjustable Rate Mortgage (ARM): ARMs often offer lower rates for the first few years, before re-aligning with market rates that adjust annually after that low-interest introductory period (usually after five years).
  • Plan to refinance: Refinancing your mortgage when rates come down can lead to long-term savings, even if your mortgage rate is higher today. Alternatively, choosing an ARM today and refinancing after the initial low-interest period can also be an effective strategy for reducing interest costs.

CS Home Mortgage is Here to Help

Buying a house during periods of high inflation can add extra financial burdens to one of the most expensive purchases you’ll ever make. But working with professional local lenders that can help you better understand market challenges and find products that fit your budget and your needs can make it easier—and more affordable.

At CS Home Mortgage, we’re here to help with all your home buying needs, from answering your first-time homebuyer questions to selecting the right mortgage and applying for your loan.

Reach out to a mortgage lender in Eureka Springs, Berryville, Harrison, Huntsville, Holiday Island, Arkansas or Cassville, Missouri today to see what we can do for you!