Buying A House During Inflation: What You Need To Know

During periods of high inflation, the prices of essentials like groceries, gas, and housing increase.

However, the primary driver behind your decision to purchase a home should be whether the timing is right for you and your particular financial situation, rather than the overall state of the economy or inflation.

In this article, we'll examine what happens to house prices during inflation, explore the pros and cons of buying a home when prices rise, and provide tips to help you make a successful purchase.

While buying a home during high inflation may seem daunting, careful planning and consideration of your personal circumstances can still make it a smart long-term investment.

What Happens To House Prices During Inflation?

The price of just about everything tends to increase when inflation is rising. Houses are no exception.

Home prices steadily rose in recent years. According to the Federal Reserve Bank of St. Louis, the median sales price of existing homes in the U.S. was $407,600 as of May 2024. In May 2023, the median sales price of existing homes was $396,500, so the price jumped by a little more than $11,000 year over year.

What Happens To Mortgage Rates During Inflation?

Mortgage interest rates don’t have to rise during periods of inflation, but they often do. That’s because of the steps the Federal Reserve typically takes to help slow inflation. These include, most notably, increasing its main benchmark interest rate – the federal funds rate.

Mortgage interest rates aren’t tied directly to the Fed’s benchmark rate, but mortgage rates typically rise when the Fed raises the benchmark rate.

Interest Rate Example

If you take out a 30-year, fixed-rate loan for $350,000 at an interest rate of 4.25%, your monthly mortgage payment – not counting taxes or insurance – would be $1,722. But, if you took out that same loan amount at an interest rate of 5.25%, your monthly payment (again, not counting insurance or taxes) would come out to $1,933. That’s a difference of $211 a month or $2,532 a year. You can see how that adds up over time.

That doesn’t mean you should refrain from buying a home when inflation and interest rates are rising. You should buy a home when it makes the most sense for you. If life changes mean it’s time to sell or buy, don’t let inflation or rising interest rates keep you from making the move to a new home.

Pros And Cons Of Buying A House During Inflation

It might surprise you that buying a home during inflation can come with both advantages and disadvantages.

Pros Of Buying During Inflation

If you buy a home now, you might be able to lock in a lower mortgage rate than you would if you waited months or years to apply for a mortgage. To keep your rate the same, though, and avoid the potential for rising market rates to impact your mortgage rate over time, you’ll need to choose a fixed-rate mortgage option.

During a time of significant inflation, your money also might have more buying power than it does later on. That’s because your money will buy less if inflation continues to rise. If you act now, you might be able to afford more home with your dollars than you would if you wait and inflation becomes even steeper.

During inflationary times, monthly apartment rents tend to rise, too. So, depending on where you live, you might make a smaller mortgage payment than you would pay in monthly rent.

Cons Of Buying During Inflation

No one can predict when inflation might ease and prices might fall. If you buy during a time of rising inflation, you might spend more than if you waited for the rate of inflation to slow, which sends mortgage interest rates and housing prices down.

You’ll also need to consider housing inventory. Since construction prices are higher during inflation, there’s unlikely to be as many new builds. The result will be less inventory and a higher demand ratio, which drives house prices up.

6 Tips For Buying A House During Rising Inflation

You can use several strategies to reduce the stress of buying a home at a time of high inflation.

1. Research Market Trends

During challenging markets – which include housing markets during times of high inflation – it’s important to study the sales prices that homes are fetching in the neighborhoods you’re interested in.

This will tell you where you can afford to move. If you can afford to spend $285,000 on a house and homes are selling for $325,000 or more in a community, you can cross that area off your home-shopping list.

To get a deeper view of specific housing markets, work with a real estate agent. An agent can give you a list of recently sold homes so you can see how much buyers are paying in the areas where you’re interested in buying.

2. Reassess Your Housing Budget

During times of inflation, it’s important to know exactly how much home you can afford. Create a household budget that lists your expenses and monthly income. This will tell you how much you can afford on a monthly mortgage payment.

It’s wise to take on a monthly mortgage payment that comes in under the maximum amount you can afford. Inflation typically increases the costs of other items – such as gas, food, clothing and electronics – so it’s best to leave extra room in your budget by not buying the home that will push your mortgage payments to the maximum amount you can afford each month.

Rising inflation can lower how much house you can afford. When home prices rise, you’ll likely need to spend more on a down payment as well as on the closing costs that mortgage lenders charge to originate your home loan.

3. Expand Your Location And Home Type

When housing prices are rising, you might need to expand the number of communities where you’re willing to buy. You might find that you can afford more of a home, even at rising prices, in a community miles away from your preferred neighborhood. Investigating these areas of lower housing prices might help you make the move to homeownership without breaking your budget.

You might also entertain a wider variety of houses. For instance, buying a fixer-upper that needs repairs or maintenance might allow you to get into your preferred neighborhood at a lower price. You might also consider single-family home alternatives, such as townhouses or condos that typically come with a lower price tag.

4. Increase Your Credit Score And Down Payment

You can boost your odds of qualifying for a lower mortgage interest rate by repairing your credit score. The higher your score, the more likely you are to qualify for a lower interest rate on your mortgage. Most lenders consider a FICO^® credit score of 800 or better to be an excellent one.

You can lower your mortgage interest rate by coming up with a larger down payment. The larger your down payment, the lower the rate that a lender is apt to charge you. That’s because you already have more invested in your home when you provide a larger down payment. Lenders tend to believe you’re less likely to skip your monthly mortgage payments if you’ve already put down a significant amount of money upfront.

5. Buy Sooner Rather Than Later

If you buy a home now, you can lock in an interest rate at today’s prices. While rates might be higher now than they were several months ago, today’s rates might also be lower than what they’ll be in the future – especially if inflation keeps rising.

If you’re ready to buy, acting quickly can leave you with a lower housing price and better mortgage interest rate.

6. Consider Other Mortgage Types

You might also save money during inflationary times depending on the type of mortgage you choose. For example, an adjustable-rate mortgage (ARM) might be a better choice for the short term than a fixed-rate mortgage.

With an ARM, you’ll get a lower-than-market-rate interest rate for a fixed period, often lasting 5 or 7 years. During this fixed period, you’ll pay less each month than you would with a fixed-rate loan. That’s because of the lower interest rate.

After the fixed period ends, your interest rate will adjust according to the economic index your mortgage loan is tied to. Usually, this means your interest rate and monthly payment will rise after the fixed period ends. Make sure you can afford this higher monthly payment at the end of your fixed-rate term. Many homeowners refinance out of an ARM before the fixed period ends, but you should be prepared for a higher rate if you’re not in a position to refinance.

The Bottom Line: Buying A House During Inflation Isn’t Always A Bad Idea

Buying a house during inflation can actually be the right move for some people. Deciding whether to make a purchase at any given time should depend, above all, on whether you believe it’s in your personal best interests.

If you’re ready to become a homeowner, you don’t have to let rising inflation stop you. Many potential buyers find their perfect home during times of heightened inflation – and you can, too.

If you’ve found the right home, get started with Rocket Mortgage^® to discuss your financing options.