How Does Inflation Affect the Value of My House?

Inflation is on EVERYONE’S mind right now, and a lot of my friends and clients have asked how and if inflation affects the value of their home.

There’s a simple answer — yes, inflation has likely affected the value of your home and the good news is that your home value has likely gone up — but there are other things to consider before you spend that money.

First things first.

What is happening in the real estate market, and why is inflation on everyone’s mind? And how does inflation affect the value of your home?

Inflation is a very real thing right now. There’s no arguing that prices are increasing across the board — for food, fuel, and places to live. But why is it happening, especially in the housing market?

There are a few basic things that drive pricing and cost in the housing market.

Of course, there’s the supply and demand issue — at this particular moment, there are more buyers than sellers, and that basic economic principle drives the cost of anything up. But, at the same time, the cost of supplies to build a home have increased dramatically, and labor costs have also gone up. I’m sure you’ve heard stories about how the cost of doors, windows and wood have skyrocketed. When the replacement value increases, so does the price of an existing home.

And don’t forget, the Federal government also issued trillions of dollars in stimulus payments during the Pandemic, which means there’s more money floating around in general.

Is there any good news, you ask?

Well, the good news is that your home could be worth 10, 20, or even 30 percent more than what you paid for it a few years ago. If you plan to sell and move to a second home that you already own, or hike and camp in the Adirondacks for a few months while you figure things out, you’ll make out great.

But if you want to use the proceeds from your home to buy something else in your neighborhood or town, it’s important to consider that everything else has increased in price, too and that you will pay a pretty commensurate amount for whatever you purchase. It’s highly unlikely that you’ll be able to sell your home at a huge profit, and also be able to buy a new house at 2015 prices (although believe me, that sure is the dream!).

There are other, less exciting things to consider. For example, you’ll want to make sure that your homeowner’s insurance covers the CURRENT replacement value of your home. Most insurance policies have mechanisms in place to adjust replacement costs along with inflation, but some don’t — so you’ll want to call your agent just to make sure. (As an aside, if you need the name of a great insurance agent who can help you do this, please reach out to me.)

Another question many people have asked me is — how long will this last? Will the housing market crash like it did back in 2008?

My crystal ball is currently out of commission, but it’s highly unlikely that the housing market will crash like it did back in the aughts. And believe me, I’m cautious because I got burned like many Gen-Xers and millenials did…. so I’m acutely aware and sensitive to this. That said, the basic fact is that the fundamental principles are much different now than they were back then.

We’re experiencing a housing crunch and price increases for many reasons — one of which is because so few homes were built between the recession and the pandemic. There was also a very looooong stretch in time when home prices really didn’t move much in most areas of the United States.

What happens next?

Right now, interest rates are ticking up, which is decreasing affordability even more for many buyers. We anticipate that this will help tamp down runaway housing prices, because as buyers retreat, prices will too.

That said, even if prices plateau or decrease very slightly, you should be in good shape so long as you plan to stay in your home for a few years. We always recommend making a purchase for the long term (unless you’re a builder or a risk junkie), and housing has — historically, with a few minor blips — been a fairly sound and stable investment. And the best thing is, unlike other financial investments, it can shelter you, too.

If you’d like an expert analysis on how much your home is worth in today’s market, please reach out to me by phone or text at 973–845–8375 or by messaging me on social. I’d be happy and honored to help you understand how this market affects your bottom line.

Thank you for reading. I hope this has helped you gain a better understanding of what factors affect the value of homes in today’s market.