Hyperinflation and Real Estate: What Is the Impact on You?

When prices go through the roof, things you need every day (like energy, fuel, and food prices) are hit the hardest. Inflation affects almost every aspect of the economy, including the housing market. In this article, we will try to understand the relationship between inflation and real estate and how Inflation affects homeowners, potential buyers, and real estate investors. We’ll also analyze whether owning property is smart when inflation is soaring.

What is inflation?

Inflation refers to increases in prices of goods and services, reducing the purchasing power of money over a short period of time. During inflation, consumers may find their money buys less than it used to, impacting everything from groceries to housing. If not checked, inflation may lead to a more serious issue—hyperinflation! This is when prices skyrocket at an out-of-control rate.

Although hyperinflation is rare, it can quickly spiral out of control once it starts. For instance, Hungary faced hyperinflation after World War II, with prices of homes increasing by 207% at its peak.

What does inflation hit the most in the housing market?

One of the most notable effects of inflation on real estate is the increase in prices of homes. As the cost of materials, labor, and land rises, so do housing costs. Although home prices increasing may benefit existing homeowners and investors, it can pose a challenge to first-time buyers.

Remember that the housing market is driven by supply and demand. During high inflation, the cost of construction may slow down the building of new homes, tightening supply. At the same time, rising wages or a fear of further inflation may increase demand, pushing prices higher.

Another huge inflation impact is seen in the rising interest rates and mortgage costs. The Federal Reserve often raises interest rates to combat inflation. This leads to rising interest rates for home loans, making it more expensive to borrow money. Higher mortgage rates can reduce affordability for buyers, potentially slowing the rate of home purchases in the short term.

Is real estate a good risk management strategy against inflation?

Real estate is often regarded as a good hedge against inflation for several reasons:

You acquire a tangible asset. Unlike stocks or bonds, real estate is a physical asset whose value typically appreciates over time.
There is always income potential. For a real estate investor, properties can generate rental income, which often rises with inflation, offsetting higher costs.
You can expect capital appreciation. As home prices increase during inflation, the value of real estate investments tends to grow, preserving the investor’s wealth.

How can buyers and sellers navigate the current housing market?

Real Estate Players	Key Considerations	Implications
For Homebuyers	Housing Inventory: While improving, inventory is still below balanced levels (4.3 months vs. 5-6 months needed).	Limited inventory can create competition among buyers, pushing prices higher.
	Home Prices: Median sale price in September was $404,500, marking 15 consecutive months of year-over-year increases.	Home prices continue to rise, but a slower pace or stagnant prices may follow as inflation cools.
	Waiting vs. Buying Now: Waiting could mean better affordability in the future if income grows faster than home prices.	Potential buyers might be able to purchase more comfortably in a few years, but this isn’t guaranteed.
	Life Circumstances: Immediate needs may require buying now, despite market conditions.	Prioritize long-term plans and ensure a sufficient timeframe to build equity before selling.
For Home Sellers	Housing Shortage: A limited housing supply provides an opportunity to sell at higher prices.	Sellers can potentially secure a premium price for their home due to increased demand.
	Buying After Selling: Selling now means entering the market as a buyer, facing high mortgage rates and competition.	Carefully evaluate affordability and availability before selling.
	Location Matters: Price growth varies regionally; the South and West have slower growth compared to the Midwest and Northeast.	Understand local market trends to set realistic price expectations.
	Long-Term Strategy: If you don’t plan to buy another home or can relocate to a more affordable area, selling now may be advantageous.	Analyze whether current market conditions align with your financial and housing goals.

What is inflation’s impact on real estate investments?

For a real estate investor, the period of inflation presents both opportunities and challenges. For instance, during inflation, owning real estate can protect wealth as property values and rental income rise. However, the increasing housing costs and interest rates can make acquiring new properties more expensive.

What are some useful homebuying tips when home prices are high?

If you’re planning to buy a home soon, here are some practical ways to make your housing budget go further:

Consider location and demand: Remember that areas with strong supply and demand fundamentals tend to perform better during inflation. Before purchasing real estate, evaluate the area’s growth potential, location, job opportunities, and housing demand trends. Neighborhoods with planned infrastructure improvements, expanding industries, or rising rental demand are likely to perform better during inflationary periods.
Boost your down payment savings with a high-yield account: Take advantage of the higher interest rates on savings accounts as a result of inflation and rate hikes. Put your down payment savings into a high-yield account to grow your money faster. Just make sure the account allows quick access when it’s time to close, as some online accounts may take a few days to process withdrawals.
Look for loan lenders with low or no fees: Instead of defaulting to your bank for a mortgage, explore lenders that don’t charge origination fees. This can save you about 1% of your loan amount. Many online and non-bank lenders offer competitive rates without these extra charges, helping you keep more cash in your pocket.
Lock in your mortgage rate: Once you’ve chosen a lender and applied for a loan, ask about locking in your interest rate. With rates fluctuating, this ensures your monthly mortgage payment won’t unexpectedly increase before closing.

Taking these steps can help you navigate the challenges of a high-priced housing market while staying within your budget.

Why is it important to plan your real estate purchase during periods of high inflation?

When buying a home during the inflation period, it’s essential to plan on staying in the property long enough to see a return on your investment (ROI). The housing market can fluctuate, and while prices may rise in the short term, they can also level off or even dip if economic conditions change. By committing to stay in the home for several years, you give yourself the best chance to build equity as the market appreciates over time. This also allows you to weather any short-term uncertainties or fluctuations in home prices.

Also, you’re more likely to benefit from the natural increase in home value that occurs as the property market stabilizes. Selling a property too soon, especially in a high-interest-rate environment, could mean you miss out on potential gains, as home values may not have had enough time to fully appreciate.

Staying put for a longer duration gives you the advantage of growing your investment while also avoiding the costs and potential losses of a quick sale.

How does the government deal with inflation?

To measure inflation, the Bureau of Labor Statistics uses the Consumer Price Index (CPI). It tracks the prices of products and services, including rent, clothes, home goods, medicines, used cars, postage, and flights.

Furthermore, the Federal Reserve aims to keep inflation around 2% over the long term, considering anything higher than that to be high inflation.

If the prices jump by over 50% per month (or sometimes even double in a single day), it becomes hyperinflation.

While hyperinflation is rare today, it has happened in history. An example is when, in the 1990s, the former Yugoslavia experienced severe hyperinflation, with rates eventually hitting 313,000,000% per month. The economy collapsed, wealth vanished, and people resorted to bartering.

The government intervened by controlling production and wages, causing food shortages and income drops. Stability was restored when the German mark replaced the national currency.

Fortunately, hyperinflation in the U.S. today is unlikely unless the economy faces extreme conditions. The Federal Reserve and the government have various tools to prevent it.

Inflation and real estate investment: Key takeaway

When inflation rises, so do home prices. This means homeowners can see their property values appreciate. Moreover, currently, there’s a shortage of about 3.8 million homes in the U.S., which is pushing prices even higher.

However, as inflation rises, so does rent growth, boosting the value of rental properties. Investors profit from higher rents and can lower their tax bills by deducting expenses and claiming depreciation on their properties.

Rents for single-family homes have been steadily increasing due to inflation and rising interest rates. The good news for investors is that as inflation boosts the value of your home over time, it increases your home equity and overall returns on your real estate investment.

Smart strategies to navigate inflation and real estate costs was last modified: November 25th, 2024 by Ramona Sinha

Written by Ramona Sinha. June 26, 2024

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.