- Written by Jonathan MacKinnon Jonathan MacKinnon
It’s official: Inflation recently reached its highest level in decades, and Goldman Sachs has predicted that the situation may become worse than initially predicted this year. The general cost of goods and services tends to increase during periods of high inflation, and real estate is no exception.
In fact, a recent Redfin survey found that 73% of homebuyers and sellers have made changes to their respective homeownership plans as a result of inflation. However, the impact will vary significantly depending on your own situation as it relates to homeownership.
For example, if you’re a current homeowner who was able to secure a mortgage with a fixed rate and low interest, you may be in luck, as home values have historically appreciated over time, while mortgage payments remained the same.
Real estate has long been considered a “hedge” against inflation — meaning it is relatively safe for homeowners in times of rapid rises in costs. Your mortgage payments typically won’t change over time, but your equity will grow.
A Challenging Time for Homebuyers
However, if you’re an aspiring homeowner who has yet to lock in a mortgage, rising mortgage rates are a threat. While it isn’t guaranteed, as the costs of consumer goods rise, the likelihood that we’ll see mortgage rates go up also increases.
Housing prices grow by the rate of inflation multiplied by the cost of the house, rather than your down payment amount. So, if inflation increased your home’s value by double, your down payment may have quadrupled in value — again, giving current homeowners the advantage in terms of equity.
Of course, this means that those seeking to purchase a home might not be as fortunate. The market was already red-hot in most areas of the country, with bidding wars and homes going for hundreds of thousands of dollars over asking price for the past couple of years.
Now, if buyers weren’t already all but priced out of homes in their areas, conditions have worsened in terms of affordability. Redfin’s report found that 29% of homebuyers put their plans to purchase a property on hold for the time being, and 24% were hoping to quickly buy a home before inflation increased further.
Senior Homeowners are Feeling the Stress
For senior homeowners, there’s also concern. A recent survey of more than 1,500 homeowners aged 60-75 found that 66% believed inflation would negatively impact their retirement, and 53% found the cost of living in retirement to be higher than they expected.
What’s worse, more than a third (36%) said they had less money than they thought they would at this point in their lives, and 37% believe they’d need more cash flow to retire comfortably.
At the same time, senior home equity reached new highs in the third quarter of 2021, growing $396 billion to exceed $10 trillion. This house-rich, cash-poor phenomenon isn’t new, but more than ever, seniors are sitting on a massive source of cash.
As a result, many seniors — and homeowners of all ages who are seeking additional financing options in the face of inflation — are looking into alternative ways to fund their retirement and other financial goals.
Traditional products like reverse mortgages, cash-out refinances, and home equity loans or lines of credit are attractive to those willing to take on debt, and with rising rates, the costs of these products are likely to increase as well.
And for those who are debt-averse, home equity investments offer homeowners a solution to access their equity without interest or monthly payments.
While the best decision for you all depends on your own financial situation and goals, the landscape has changed in recent years, and there are more opportunities than ever to access your equity without selling your home or taking on debt as you navigate through the challenges and opportunities that come along with inflation.
Jonathan MacKinnon, Hometap’s VP of product strategy and business development, has more than 15 years of experience in management, business and corporate development, and investing and operations. He was the head of growth and operations, consumer finance for CarGurus and the senior director of business operations and general manager for PistonHeads.com.