How Does Increasing Inflation and Interest Rates Affect My Buying and Selling Decision in Real Estate?

Interest Rates’ Effect on Housing

Treasury bonds have witnessed intense volatility in the last few weeks- as yields have shot up to 3.83% on the 10-Year Treasury. That yield was at 2.14% during the nadir of the economic crisis.

What does that mean for the housing market? Mortgage rates have a historical relationship with the 10-Year Treasury- typically moving up and down with the yield on the 10-year Treasury. Rates have shot up from the high 4’s and now sit squarely in the mid 5’s. That is bad news for homebuyers. Although rates are still historically low, they are no longer ridiculously low.

Housing affordability will worsen as rates increase. If housing prices do not fall further- then those buyers that purchased in the last 6 months may have scored in two big ways

1) They may have bought at the housing bottom. (too early to tell).
2) They may have bought at the interest rate bottom- locking up 30 year loans under 5% interest.

A New Era of Rising Inflation

We will be entering an era of rising inflation due to the massive monetary stimulus of the last year. Most economists do not contest this. Flooding the global economic system with money will lead to inflation. The counteracting deflationary forces would be continued job losses, prolonged recession and further asset price deflation. These forces have kept inflation in check so far- but for how long?

As inflation rises- interest rates rise. As interest rates rise housing affordability falls thus house prices are put under a ceiling.

The flip side is that historically, house prices rise with inflation. If you think about it- a house is just a big basket of commodities nailed together. It makes perfect sense that as the price of a basket of goods increases so would the price of your house. Your house is a big basket of wood, metal, glass, concrete, etc…

So, the question is- if inflation comes in a strong way- in a way we have not seen since the early 1980’s- will the forces pushing house prices down outweigh the forces pushing house prices up?

I believe house prices will remain somewhat flat- neither falling nor rising in dramatic fashion during the next few years.

I do believe that the recent move in interest rates has quickened the pace of buyers- as they fear that interest rates will continue to climb as the economy recovers and they look to lock in long-term housing affordability while both prices and rates are low.