Over the last few years, historically low interest rates have helped make it more affordable for many people to buy their first home. This increased demand for homes has also contributed to higher prices in the Twin Cities and across the country, making it harder for some people to buy. Home prices have actually been rising faster than inflation, leaving people to wonder what this means for the market. What Is Inflation?
Inflation is when the value of money shrinks over time. A $1 bill is still a $1 bill, but it buys less. For example, in 1945, a $1 bill would buy about $15.44 in goods today. Experts measure inflation against a “basket of goods,” giving a number value to what most people buy regularly.
In November 2021, inflation went up about 6.8%. This is the highest rate recorded in 60 years. Inflation is rising for many reasons, and unfortunately, most of them are not under anyone’s control. Take COVID-19 for example. The increase in online shopping has put a strain on freight transport. This means there needs to be more people, equipment, transportation, shipping containers, and so on to make operations run smoothly. Simply put, more money is needed to get products from Point A to Point B than in the past. The same goal is getting accomplished, only it's costing more to get it done—resulting in global inflation.
Many experts believe the rate of inflation will slow down in early 2022. But that does not mean prices will go back to where they were. Instead, it only means the speed at which prices are going up will slow down.
Rent and the Cost to Buy Are Rising Too
One area that inflation is having a big impact is on rent. According to the Bureau of Labor Statistics, housing is the biggest expense for Twin Cities families, and the cost of housing is rising. The median cost of a 2-bedroom apartment (median means half of houses are more expensive and half are less expensive) in October 2021 was $1,389. That’s up from $1,300 the year before (a 6.9% increase).
Home prices are rising even faster. In April 2021, the median home price in the Twin Cities hit $337,000. This was the highest figure recorded to date and was 10.5% higher than in April 2020.
Wages are Rising But Is It Enough?
The pandemic has caused average hourly earnings to go up more than 5% in the past year. But despite the gains, Pew Research says, “real wages have barely budged in decades.” The term real wages refers to the value of the money paid to employees after adjusting for inflation. If wages are not increased to match inflation, nothing is really accomplished.
What Does It All Mean?
There are many reasons that home prices don’t rise and fall with inflation. Homes are long-term assets that help build wealth. Their cost is a reflection of that potential for growth over time. Plus, since 95% of people don’t move in a given year, they aren’t affected by the rising costs.
All this means home prices may still rise even after inflation slows down.
That could be a big problem for renters in the Twin Cities who want to become homeowners, and here’s why:
1. Not All First-Time Homebuyer Programs Can Help with High-Priced Homes
As home prices go up, there are fewer programs that can lend you all the money you need. Government first-time homebuyer programs provided by the FHA, VA, and USDA usually have good interest rates and low down payments. But they are not designed to pay for a very expensive house.
2. Lenders Could Make Their Standards Stricter
The more you need to borrow from a lender, the less likely you are to qualify for your loan. This is true even if you have a good income and credit. Lenders reduce risk by going with “sure thing” borrowers. Plus, it’s harder for you to compete with real estate investors who pay in cash.
While the concept of inflation can be alarming, it does not mean you should put the breaks on finding your home. Navigating the housing market can be difficult, regardless of whether inflation plays a role or not. By providing ample access to a first-time homebuyer guide, webinars, and informational videos, we hope to help you feel informed and confident when making the decision to purchase your next home.