How will inflation affect buying a home?
Did you know there are over 43,000 homes for sale in Maricopa County as of June 1st, 2011, according to the ARMLS?
Thirteen thousand of those homes are in "sale pending" mode, but if inflation occurs, how will it all affect you?
Dean Wegner, Consumer Finance Expert, came on Smart Family to help understand how inflation may affect homes being sold and how much your mortgage payment will be.
To have a full understanding of inflation, I asked Dean what inflation really means. He says in short it means that the value of the money used to purchase goods goes down, while the value of the goods themselves stays the same. That means basically that our dollar value goes down so you will need more dollars to buy the same products. Dean adds that inflation occurs when our government puts more money into our system it dilutes our currency and in turn, it takes more money to buy the same goods, things end up costing more.
Dean states that when inflation occurs, often interest rates to borrow money go up. So when the dollar goes down in value then investors will require higher interest rates on long term debt like mortgages to offset the risk of losing all of their profit to inflation. Bottom line, investors will require higher interest rates on their money they loan in order to make a profit do to inflation.
With inflation and the housing market being so flooded with homes for sale, fixed mortgage rates may be a thing of the past. Dean adds that in periods of high inflation, it is likely you will see fixed mortgage rates disappear as investors would nearly always lose money on long term loans in this environment. This does not mean the government will not intervene and provide a "fixed" solution. The United States is the only country in the world with fixed rates for home loans. We will have to wait and see we can’t predict the future.
Dean also pointed out that investors giving out money long term require a return on their investment regardless of the state of the economy. If they have to charge a higher interest rate to ensure a profit then a good economy or bad, that is what they will have to do.
When it comes to how higher interest rates and how it may affect an already unstable housing market, Dean says if interest rates go up then it will surely slow down the housing market even more and the foreclosures will take even longer to go through the system. Sophisticated investors are drawn to real estate as it is a safe place to invest in a high inflation environment.
Dean says that is why investors react fast to inflation as it can turn into a sour investment really fast. On a side note, just by chance, today’s mortgage interest rates is the lowest it has been.
http://www.abc15.com/dpp/lifestyle/family/how-will-inflation-affect-buying-a-home