A Taste of the 1970s? Inflation and rising mortgage rates will add pressure to real estate markets.

While I don't always agree with Real Estate Economists, I think Mr. Young is right in his real estate market forecast. In 1974 I purchased this home in Porter Ranch for $49,000.00. I used my VA loan, which had an interest rate of 9.5%. Today the property is valued at more than $1M. It's important to understand the market fluctuations when deciding whether to buy or sell a home. Unfortunately, it is tough to time the market. Continue reading...

Inflation is edging higher, which doesn’t bode well for interest rates. The consumer price index rose 1.7% year over year in February after having sunk to nearly zero in the early months of the pandemic. The increase was driven by higher prices for used cars, utilities, meat, and health care. In addition, rental housing costs rose 1.5%. And while February home prices rose 15% for the year, they’re not in the index. Besides causing consumer irritation, inflation can push up mortgage rates. The Federal Reserve recently said it wouldn’t raise interest rates until at least 2023. No matter, mortgage rates will still climb.
Millennials have never experienced 1970s-era inflation, but they could get their first taste. Then, inflation averaged 7.1% annually, topping out at 11% in 1979—the same rate as the 30-year fixed mortgage. The primary cause? Excessive printing of money. And something similar is occurring now. The Fed prioritized reducing unemployment and keeping inflation under 2%. But its goals have loosened, and inflation as high as 5% may be tolerated. So why does inflation lead to higher mortgage
rates? Lenders don’t want to issue loans at meager rates, knowing that, if they did, their returns would fall. While the Fed has said it wouldn’t change very short-term rates, it can’t control long-term rates, which can quickly rise if lenders get nervous
about inflation. For now, mortgage rates are still desirable at around 3%. One component to monitor is housing rents,
which, before the pandemic, were rising by 3.8% annually. Rental demand softened due to the pandemic, but now that jobs are returning, vacancies are falling, and rent increases may again approach 4%. As a result, inflation will end the year above 2%. Higher inflation looks likely in 2022 and beyond. As mortgage rates head higher, becoming a first-time homeowner will get more challenging. But current owners have fewer worries. In the 1970s, the median home price rose from $23,000 to $55,700, an average annual gain of 9.9%—and a reminder of the wealth-building potential of homeownership.
Lawrence Yun
NAR chief economist