Home Price Appreciation vs. Inflation Rate: Which One Is Higher?

Inflation Sign in front of Stacks of Coins

"Inflation." It's the word everyone is suddenly talking about, from economists on TV to people surprised by the prices at the local Publix market. There are good reasons for this - the latest inflationary numbers are not encouraging, with the CPI now up to 9.1%! Given that many of our prospective buyers and sellers haven't ever dealt with real estate in an environment like this before, we thought it would be helpful to do a blog on home price appreciation vs. inflation rate and see how they work together. Also, let's look at which one is higher (that is, will your home go up more than inflation, thereby making it an excellent investment?).

We must first explore how inflation affects property prices to answer these questions.

Home Price Appreciation vs. Inflation Rate: How They Intersect

Highways intersecting in wooded area

How home prices and inflation intersect can be an incredibly complex economic topic as numerous factors go into this dynamic.

A high inflation rate alone, left unchecked by the Federal Reserve, would send property prices soaring. The cost of goods will go up, then salaries will eventually go up to compensate, and, as you would expect, housing would also go up with it. Rising equities would make raising capital for building projects, buying homes, and creating new communities easier.

However, the reality is that inflation does not go unchecked. Inflation greater than about 3% annually is not healthy for an economy, so the Federal Reserve steps in and raises target interest rates to curb inflation. Effectively, the Federal Reserve makes the cost of money itself more expensive. While the Federal Reserve interest rate does not directly influence mortgage rates, these increases often have the side effect of increasing mortgage rates.

Increasing mortgage rates means homeowners must pay more monthly to afford the same property. For example, a $500k loan for a home in Charleston at 3.5% interest is a mere $2,245. However, a $500,000 loan at 6.5% interest is $3,160 - nearly $1,000 a month more!

Therefore, inflation increases the cost of everything, helping homes appreciate, but it also triggers a monetary response that makes mortgages more expensive.

How Does This Impact Property Prices?

Model Charleston Home and Coins balancing on block

Consider these three data points regarding how inflation rates affect home prices.

First, changes in interest rates weakly correlate with property price increases, but perhaps surprisingly, that correlation is positive. That is, higher interest rates and higher rates of appreciation are somewhat likely to happen together. While this may seem counterintuitive, it makes sense: high-interest rates typically correspond with more robust economic times, which means that people have the resources to pay more for homes!

Secondly, perhaps somewhat unsurprisingly, the inflation rate is one of the best indicators of appreciation rates. High inflationary periods lead to increased property price appreciation!

However, quickly increasing interest rates (which happens in response to inflation) decelerate price appreciation. Home prices tend to grow more slowly as inflation gets more under control. They usually don't decrease, but they will slow down as the cost of a mortgage becomes increasingly expensive.

Eventually, property prices increase more in line with the inflation rate but are usually ahead. So instead of rising 10% or even 20% per year with inflation also at 10% annually, perhaps the housing market and inflation will go up at a more manageable 3% (inflation) and 5% (housing) per year. Looking at the data, inflation-adjusted returns, even factoring in inflation, have almost always been positive in history - meaning that price appreciation for real estate is greater than the inflation rate!

There Are Other Factors This Time

Charleston Homeowner Thinking about housing market while starting at phone

With that said, looking at the past data points may not give us a crystal clear picture of home price appreciation vs. the inflation rate this time. There are a few differences between the current situation and the previous ones.

For starters, America (and Charleston) have significant housing inventory shortages. The lack of supply means that prices will likely remain buoyant, even if the Federal Reserve does continue to raise rates.

Secondly, despite the increase in interest rates, they are still quite a bit lower than many times in the past. Even though 6%+ might seem high on a mortgage now, it's worth considering that it could still be relatively inexpensive. If the Fed needs to raise rates to 8%-10% or even higher to curb inflation, we could see mortgage rates that are 10%+. Buying a new home now, and locking in a rate, is still quite a fiscally-sound move. In the recent past, any attempts to raise rates have eventually fizzled out, but the rampant inflation means that the Fed will have to continue raising rates upward!

Demand should remain firm for the foreseeable future as people are looking to close housing deals before the Fed raises rates even further!

Finally, COVID changed where people live and work. Many areas, like Charleston, have seen interest from people wanting to work remotely and will continue to be in high demand. And Charleston is still relatively inexpensive. People will still be moving here. As life in the large metropolitan areas becomes even more unaffordable, people will still want Charleston for a family-friendly, financially-stable future.

Put another way, none of the previous metrics factored in the workforce dynamics that have changed since COVID. Due to that, Charleston still likely has quite a bright future in terms of property price appreciation!

Home Price Appreciation vs. Inflation Rate: Your Home Itself Has the Biggest Impact on Appreciation

Dog sitting on front porch of Charleston, SC home

To summarize, home prices, with the rare exception of the 2008 Great Recession, almost always increase. Inflation will buoy those increases, while increases in interest rates will temper price gains. When looking at the home price appreciation vs. inflation rate, it becomes easy to see that homes, as a whole, are a pretty good hedge against inflation, unlike some other investment types.

However, ultimately, the home and area you choose will impact appreciation most. Fortunately, Charleston is an in-demand area, and even more in-demand, thanks to the ability of people to work remotely. People love the friendly atmosphere, sunny skies, gorgeous scenery, and beautiful history this city offers. If you pick the right property here, your home will always have value - not because of some large-scale macroeconomic forces - but rather because you've chosen one of the best places in the country to live.

If you're looking to find your perfect Charleston property, please get in touch with us. We'd love to show you what this beautiful city offers, help you lock in an interest rate before they go even higher, and find you your little piece of Charleston paradise!

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