When is the “right time” to buy a home? In today’s hectic markets, buyers may wonder about buying a house during inflation.
Fortunately, there’s no right or wrong answer to this question; it depends on the borrower’s unique financial situation and goals.
What's in this article?
With this freedom in mind, let’s dig into how inflation impacts the homebuying process, including interest rates, home prices and strategies for purchasing in any market.
How does inflation impact homebuyers?
Inflation is most simply recognized as the rate of increase in prices over a specific period.
While inflation is slowly improving, the nation is still dealing with increased prices in 2024 due to ongoing post-pandemic supply chain disruptions, global recovery efforts and heightened consumer demand.
Let’s examine how inflation impacts interest rates and home prices and why they may remain elevated even as inflation improves.
Inflation and interest rates
As inflation rises, the Federal Reserve intervenes by increasing the funds rate to curb the impact on consumers.
The federal funds rate impacts short-term interest rates, such as those for credit cards and savings accounts. Higher rates make borrowing more expensive and slow down consumer spending.
While the Fed doesn’t directly increase mortgage interest rates, similar factors influence all types of interest rates. Lenders adjust their rates for mortgage loans to reflect the higher cost of borrowing money in general.
As a result, higher mortgage interest rates create larger monthly payments for borrowers.
Inflation and home prices
Inflation increases the cost of building materials and labor and can lead to a home supply shortage, which in turn raises home prices.
Even as inflation improves, home prices can remain elevated due to the following factors:
- Limited home supply
- Construction delays
- Strong demand
High demand and low supply often lead to bidding wars, in which buyers must offer even more to secure their desired home.
One way to avoid obstacles in a competitive market is to secure a fully underwritten loan commitment with Get Committed® from Compass Mortgage.
This commitment gives buyers the power of a cash offer and the edge they need to make their offer stand out.
Ready To Take Your Next Step?
Should you buy a home during inflation?
The decision to buy a home is deeply personal. It should be driven by your own financial readiness and goals rather than what others say about the current market.
Let’s examine the pros and cons of buying a home during inflation to help you decide.
Pros of purchasing a home during inflation
- You can start building equity: Homebuyers accumulate wealth in their homes as they make their monthly mortgage payments. If home prices continue to rise, your equity will also increase.
- Real estate can be a hedge against inflation: Real estate generally appreciates over time at a rate that outpaces inflation. A home can be a stable investment during periods of inflation.
- You can lock in a fixed rate: If you secure a fixed rate now, your mortgage payments will remain consistent over the life of the loan. Compass Mortgage allows borrowers to lock in their rate with our Get Committed® program. (Plus, you can consider refinancing at a lower interest rate in the future!)
- You can access tax benefits: Homeowners often can deduct mortgage interest on their tax returns. Consult with your tax advisor to better understand your options as a homeowner.
Cons of purchasing a home during inflation
- Affordability issues: Higher home prices and interest rates can make it more difficult to afford your desired home.
- Market uncertainty: Understanding the best buying time can be challenging if inflation makes market conditions unpredictable.
Tips for homebuyers
Whether you are ready to buy a home now or decide to wait until you are more financially ready, future buyers can make the process much smoother with the following tips and strategies.
1. Reevaluate your budget
Start by taking a closer look at your homebuying budget through the lens of inflation.
Consider the following:
- Monthly income
- Living expenses
- Debt payments
- Down payment savings
- Emergency fund
- Estimated taxes and insurance
- Maintenance and repairs
- Closing costs and fees
Costs can shift significantly quickly during periods of high inflation. Ensure you have a realistic view of your budget, savings, and what you can afford in a home.
Use our Mortgage Payment Calculator to help you estimate your monthly payments.
2. Improve your credit score and down payment
A high credit score and down payment can lower your interest rate, helping to make homeownership more affordable in the long run.
To improve your score, work to pay down as much debt as possible and schedule automatic payments to ensure you never miss a due date.
Remember that a down payment of at least 20 percent eliminates the need to pay private mortgage insurance (PMI) on a conventional loan. Aim to make as large a down payment as possible to avoid the added expense of PMI.
3. Lock in your interest rate
Compass Mortgage allows borrowers to lock in their interest rate for a specified time.
Locking in a rate will protect it against future increases, ensuring that your payment will remain the same over the life of the loan.
With our Get Committed Plus program, you can lock in your rate even before finding the home you want to buy.
4. Explore your mortgage options
Compass Mortgage offers a range of loan products and programs to help make purchasing a home as affordable as possible.
Ask us about government-backed FHA or VA loans, adjustable-rate mortgages or 2-1 buydowns, all of which offer more flexible financing options for qualified borrowers.
5. Reconsider your needs and wants
Perhaps you had your heart set on a particular neighborhood or desired a home with a specific number of rooms or features.
Consider whether any of these needs are negotiable and whether the additional savings from a different property type could be worth it.
6. If you’re ready, don’t wait
Knowing where rates and home prices will head is difficult, especially if inflation takes a while to ease.
If you are ready to purchase a home now, don’t wait! Acting now could secure you a better interest rate—possibly even a better home price—than whatever the future may bring.
Get Committed® with Compass Mortgage
In competitive markets, buyers need a lender who will act as their partner and advocate.
Compass Mortgage’s Get Committed® program provides a fully underwritten loan commitment and locks in your interest rate.
A loan commitment essentially has the power of a cash offer, showing the seller you’re fully approved financially and that your deal isn’t likely to fall through.