Ongoing supply chain problems and record-high inflation have a massive impact on almost every industry and market—including real estate. Whether you’re a current homeowner looking to move or a prospective homebuyer eager to find a place of your own in 2022, it’s helpful to understand the different factors at play in today’s housing market.
Keep reading to learn more about inflation, how rising home prices will affect your next move, and what to keep in mind this home buying season.
What is inflation?
Inflation refers to an increase in the price of goods and services, and a subsequent decrease in the value of money. Pandemic-fueled supplier shortages and increased customer demand have caused costs to rise dramatically.
According to the US Bureau of Labor Statistics, the Consumer Price Index (CPI) recently saw its biggest 12-month increase in 40 years, rising 7.9% from February 2021 to February 2022. The CPI’s shelter category—which accounts for the cost of rent and “implicit rent” for tenants and homeowners, respectively—increased 0.5% in February 2022 alone.
How is inflation impacting real estate in 2022?
Inflation has a ripple effect on the real estate market, affecting everything from home prices to mortgage rates. Here are five important things to know about housing and home buying in 2022:
1. Mortgage rates are higher—and may keep increasing
Interest rates on home mortgages are increasing reasonably fast. As of March 2022, the average interest rate for a 30-year fixed-rate mortgage is 4.59%, up from 2.65% in 2021. To combat worsening inflation, the Federal Reserve—the central bank that dictates interest rates—is planning to raise its benchmark short-term interest rates by 0.5% in 2022. Current interest rates are climbing as a result.
As a prospective homebuyer, higher mortgage rates give you less buying power. The higher the rate, the less money you can borrow; ultimately, you may have to look for homes in a lower price range. Keep in mind, though: interest rates are relative. Compared to the historically low rates of 2020 and 2021, these 2022 rates may look intimidating, but they’re still fairly average when you look at rates over the last 20 years.
2. Home prices will be near record levels
Home prices continue to be high in 2022 but may plateau or lessen throughout the year as the Federal Reserve hikes up interest rates. The cost of homes shot up 18.8% in 2021, marking the highest calendar-year increase in 34 years, according to the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index. January 2022 saw the same pattern, with S&P reporting a 19.2% annual increase from January 2021.
However, experts are predicting a slowdown sometime soon. According to a 2021 report from the National Association of Realtors (NAR), median home prices are expected to increase by 5.7% in 2022, with inflation rising by 4%. As a first-time prospective homebuyer, it’s still a challenging time to make an offer, but you may find slightly more affordable home options—or experience fewer bidding wars—as the year goes on.
3. Supplier chain problems are slowing down home renovations
Supply chain issues still present problems in 2022. Manufacturing delays, shipping delays, and high shipping costs have drawn out or stalled most home renovations and repairs. If you plan to sell your home this year, you may end up spending more time and money doing basic upgrades or repairs in preparation for listing your place.
If you’re gearing up to buy a home, on the other hand, be willing to adjust your plans or expectations. If you don't have the budget or time to fix up a new home, you may want to reevaluate your must-haves or start considering turnkey properties.
4. Home inventory is extremely low
Available homes are still in short supply. According to the NAR, housing inventory in the United States is at an all-time low. Total housing inventory at the end of January 2022 was down 16.5% from January 2021.
There are two key factors at play. Supplier shortages significantly slowed down construction on new builds over the past couple of years, limiting the number of affordable condos, townhomes, and apartments available. At the same time, demand for housing increased as more people started working from home, millennials began entering the housing market, and homeowners in cities started exploring suburban areas.
The low volume of available homes means that not only will home prices stay high in 2022—but you’ll also have fewer options as a first-time buyer without existing home equity.
5. It’s a strong seller’s market
Low home inventory and high prices have given sellers all the power this year. If you’re a current homeowner looking to move, you’re in a great spot to sell. Inflation may have increased the value of your house significantly, increasing the value of your down payment, too. If you have a fixed-rate mortgage, inflation means you’re paying less for the loan now than when you first got it.
However, if you’re a first-time homebuyer in 2022, you have more obstacles to overcome in a seller’s market—namely, steep competition. Similar to 2021, you’ll likely have less negotiating power when making an offer, meaning you may have to be flexible with your terms.
Sellers vs. buyers in 2022: The takeaway
This year, sellers and buyers are at opposite ends of the spectrum.
Sellers
If you want to trade up, now’s a good time to make a profit on your home and potentially buy a more expensive property. However, it’s also a smart time to downsize; you could stock away a lot of money if you sell your home at a profit and buy somewhere cheaper.
Buyers
If you’re buying a home for the first time, be prepared for some challenges. You might be competing for fewer homes with higher market prices and have less wiggle room in your contracts and negotiations.
Should you buy a home in 2022?
Whether or not you purchase a home in 2022 depends on your finances, family needs, location, current living situation, and long-term goals. The choice to buy can be complicated, but here’s a simplified way of looking at the situation.
The cost of rent in 2022 is likely to keep increasing with inflation. On the other hand, the cost of buying—though expensive upfront—could pay off in the long run. Let’s assume home prices stay high; if you buy a home now and score a lower interest rate, you could end up saving tens of thousands of dollars in interest over the course of your 30-year fixed mortgage.
If you plan to stay in your home for five or more years, buying at a high price with a lower interest rate can be a wise long-term investment. However, if you’re overpaying for a home you don’t think you’ll stay in for more than a few years, you could be caught upside down—and unable to sell—if the market turns.
3 tips for buying a home in 2022
If you’re ready to buy a home, make sure you:
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Get your finances in order: Break down your budget (including your cash cushion for emergencies and unforeseen expenses), work on improving your credit score so you can score a lower mortgage rate, and talk to an accountant.
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Expand your home search: Be willing to explore new areas.
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Clarify your deal-breakers: Speed is of the essence this year. Make sure you understand your deal-breakers and be prepared to move quickly on submitting an offer.
What does inflation mean for my home insurance?
Home insurance rates are rising faster than inflation. The average annual premium for home insurance in 2021 increased to $1,398, according to the Insurance Information Institute. Part of the reason is that many areas are at an increased risk of natural disasters due to climate change.
There are a few different ways to keep your home insurance costs lower. You can choose a plan with a higher deductible, for example, or look for discounts by bundling insurance policies. But your best bet is to find the home insurance provider and plan that gives you the most protection—and peace of mind—for your money.
At Hippo, we bundle home insurance with smart technology so you can stay one step ahead of problems and crush it as a homeowner. All homeowners can also access Hippo Home for more support on your homeownership journey.
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