The Effect of Inflation on Housing Prices
Product supply and demand levels are often key indicators of economic growth, stagnation or decline. Inflation rates can be adjusted according to economic activity as a way to regulate or promote overall growth. In the process, housing prices may increase or decrease depending on supply and demand factors within the housing market.
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Inflation
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As economies experience growth and increased economic activity, increases in product demand can result in higher prices. According to Investor Guide, this increase in prices represents inflation, as product demand surpasses product supplies. These conditions can also influence housing prices as the demand for houses increases as well. And while high inflation rates may result from a strong economy, rates that remain too high for too long can have an adverse effect on overall economic growth.
Function
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According to the Investor Guide, two primary indices are used to keep track of changes in the inflation rate: the consumer price index (CPI) and the producer price index (PPI). The CPI tracks price increases (or decreases) on groups or bundles of products and services purchased by consumers, while the PPI tracks price changes as they affect producers or those who offer goods for sale. Both indices track changes in purchasing power within the economy, which can affect a home buyer’s leverage when house prices are affected.
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Interest Rates
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Interest rate levels directly affect the rate of money flow within an economy, according to Investor Guide. Low interest rates tend to stimulate the economy, as more purchasers try to take advantage of reduced loan and mortgage rates. Lower interest rates mean the total payoff amount on a loan or a house will be smaller. When interest rates climb, borrowing money becomes more costly. According to Investopedia, the U.S. Federal Reserve adjusts interest rates on a regular basis in an attempt to create economic growth and keep prices at a reasonable level.
Mortgage Interest Rates
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According to the US Mortgage Rates resource site, the effects of inflation can significantly affect a consumer’s buying power when purchasing a house. Even a reasonably priced home can become unaffordable when high interest rates are a factor. When interest rates translate into mortgage interest rates, the overall price of the house increases and so does the monthly mortgage payment. A significant increase in the monthly mortgage payment can be the determining factor in terms of a buyer’s purchasing power.
Supply and Demand
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In general, interest rates and mortgage rates tend to increase or decrease at the same rate; however, supply and demand still determines an industry’s overall trend, according to Choice Finance. In some cases, supply and demand levels for mortgages may differ from the overall supply and demand levels for products and services. When this happens, the effects of inflation on mortgage interest rates may differ from the effects on goods and services. As a result, changes in housing prices may not reflect overall inflation rates because of these differences.
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