How does inflation impact real estate markets?
February 17, 2023
Inflation is a common economic phenomenon that occurs when there is a general increase in the price of goods and services over time. The impact of inflation on various markets can be significant, and the real estate market is no exception. In this blog post, we will explore the ways in which inflation can impact the real estate market.
One of the most direct ways that inflation can impact the real estate market is through mortgage rates. When inflation increases, the Federal Reserve often responds by raising interest rates in order to combat inflation. This increase in interest rates can impact mortgage rates, as they are often tied to the 10-year Treasury yield. As mortgage rates rise, the cost of borrowing for home buyers increases, which can lead to a decrease in demand for homes. This, in turn, can lead to a decrease in home prices as sellers may be forced to lower their asking price in order to attract buyers. On the other hand, when inflation is low, interest rates tend to be low, which can make borrowing cheaper and increase demand for homes.
10-year Treasury yields
The 10-year Treasury yield is often used as a benchmark for interest rates across various markets. When inflation increases, it can lead to an increase in the 10-year Treasury yield. This increase in the 10-year Treasury yield can lead to an increase in mortgage rates, as mentioned earlier. Additionally, an increase in the 10-year Treasury yield can also impact real estate investment trusts (REITs) and other real estate investments. As the yield on Treasuries increases, investors may be less likely to invest in REITs and other real estate investments, as the relative return on these investments may not be as attractive as investing in Treasuries. This can lead to a decrease in demand for these investments, which can lead to a decrease in their value.
Another way that inflation can impact the real estate market is through affordability. As inflation increases, the cost of goods and services increases, including the cost of building materials and labor. This can lead to an increase in the cost of building new homes, which can make it more difficult for developers to build affordable housing. Additionally, as the cost of living increases, it can become more difficult for individuals to save for a down payment or qualify for a mortgage. This can decrease demand for homes, as fewer individuals may be able to afford to buy a home.
In conclusion, inflation can have a significant impact on the real estate market through its impact on mortgage rates, the 10-year Treasury yield, and affordability. While low inflation can lead to low interest rates and increased demand for homes, high inflation can lead to higher interest rates, decreased demand for homes, and decreased value for real estate investments. It is important for investors and home buyers to consider the impact of inflation on the real estate market when making investment decisions or purchasing a home.
This blog post should not be treated as investment or legal advice.