How Inflation Affect Homebuyers And The Mortgage Markets

Gustan Cho Associates are mortgage brokers licensed in 48 states

This Article Is About How Inflation Affect Homebuyers And The Mortgage Markets

It seems like every time you turn on the news, we hear the word “inflation”. In this article, we will go over the current rate of inflation throughout the country and break it down by sector. We will also go one step further and discuss the effects inflation has on the mortgage market. The news on inflation seems to be contradicting and it is tough to understand who you can trust. Gustan Cho Associates are experts in mortgage lending and have many loan programs available for our borrowers without lender overlays. Inflation is something that is affecting everybody, especially those attempting to buy a home. This article will include many pieces of information some of which are opinions as true inflation numbers can be speculative.

What Does Inflation Mean

First, we must understand what inflation means. Inflation is a term used in economics that refers to the rising prices of goods and services within a particular economy. A general rule states as prices rise the purchasing power of consumers decreases. As the cost of a certain good or service goes up, a person can buy less of that item. Lately, you may have heard news outlets attempt to tell you that inflation is a good thing. That is not true in my opinion. Since inflation is the rise of prices for goods or services over time, the amount of money you owe for goods or services will increase. This can be horrible if your wages are fixed. If you are on a fixed income, you are feeling the maximum burden of inflation.

Skyrocketing Price Of Goods And Services

According to our government, the year-over-year inflation number through October 2021 was 5.9% (some reports are showing 6.2%). In my personal opinion, I think it’s much higher than that. But even at 5.9%, this is the highest rate of inflation in 31 years. The last time Americans felt this level of inflation was the year 1990 when things were quite a bit different. The median age in the United States is currently 38, so many of us cannot fully understand the consequences. According to the Washington Post, here are a few sectors with the highest increase in prices.

The figures below are year over year data:

  • Fuel oil up 59%
  • Gas up 50%
  • Utility up 28%
  • Used cars of 26%
  • Hotels up 26%
  • Washing machines up 15%
  • Furniture of 12%
  • Televisions up 10%

The Sudden Increase Of Food Costs Is Alarming

The sector hitting most Americans the hardest is our food costs. When headed to the grocery store you can expect to pay quite a bit more for most items on your list. According to the same Washington Post article, prices are up as follows:

  • Steaks are of 24%
  • Bacon is up 20%
  • Pork is up 16%
  • Eggs are up 12%
  •  Fish is up 11%
  • Chicken is up 9%
  • Milk is up 6%

In my personal experience, trips to the grocery store have been incredibly expensive. Not to mention many items are not even available. I have seen low inventory on many products such as pork and beef. Items such as cheese and pizza dough have also been unavailable for a few weeks now. This is due to the supply chain issues plaguing the country at this moment. The costs at the grocery store are quite a bit higher than Americans are used to. When speaking with my next-door neighbor, who is currently retired, he said the costs at the grocery store are changing his lifestyle. While the Social Security Administration is raising his Social Security income by 5.9% for 2022, that is not enough for average Americans to keep up with this pace of inflation. According to my neighbor, when he does receive the 5.9% that amount (in January 2021) will be spent with just a trip to the grocery store. Not to mention factoring in the cost of gasoline. This will put many individuals on a fixed income in a bind. Also, if you are a salaried or hourly employee and have not received at least a 5.9% raise in 2020, then you are in theory experiencing a pay cut due to rising costs and virtually every sector of the economy. While someone like my neighbor is not in the market for a used or new car, everyday products such as food and gasoline are a necessity for life. His personal story includes a change in lifestyle. He is no longer going out to eat at restaurants which also puts a bind on the local economy. Some argue that inflation will result in higher wages (nobody has complained about higher wages), but when those gains are spent instantly on maintaining your current lifestyle, can you even consider it a raise? Just last week I was buying a quart of paint that cost $26! This was your everyday paint, not specialty paint. On the register, there was a printed sign stating there has been a 4% increase in all prices across-the-board due to supply chain issues. If you have been paying attention, I’m sure you are seeing similar signs and many help wanted signs in your area.

How Inflation Negatively Affect Homebuyers And The Mortgage Markets

How inflation harms mortgage borrowers attempting to enter the housing market:

Saving for a down payment to buy a house is difficult enough without sky-high inflation. If you are forced to pay more for virtually everything you currently buy, saving money is going to be near impossible. Many borrowers were having trouble with saving for down payment even before the excessive inflation. Investment mogul Warren Buffett has given some tips to prepare for inflation according to a recent article featured on MoneyWise. He urges Americans to increase their earning power by finding a side hustle with their time off work or finding a job with higher pay. He then encourages you to play the stock market as stocks have historically outperformed inflation. This is a way to hedge your money against flying high prices. He also encourages you to invest in precious metals such as gold, which has risen in value by 52% in just the past five years. If you can, bring down your consumer debt.

Consumers With Substantial Debts

If you are carrying significant debt, this can really hurt during times of inflation. It is important to cut your costs as much as possible. He strongly encourages individuals to stay away from adjustable-rate loans. When inflation heats up, interest rates usually follow. If you are carrying debt with adjustable rates, like a credit card or home equity line of credit, as inflation ticks up, the amount of interest you will pay will also tick up. The main takeaway I received from this article was he encouraged Americans to capitalize on the current real estate market. Real estate has proven to be one of the most reliable long-term investments over the years. If you’re ready to buy at home, capitalizing on these historically low-interest rates is key. Entering a low rate 30-year fixed mortgage can be a great tool for financial success. As inflation rises the cost of everything seems to go up including real estate. So, if you can get into the real estate market in the lock in the historically low 30-year fixed mortgage interest rate, this can be a great tool against inflation. When buying a house, you get locked into your principal and interest payment so you will not have to worry about rising rent costs in the future. Also, you build equity as you pay your loan down and your home appreciates in value. This is how you can turn your housing expense into future equity.

How Inflation Affects The Rental Housing Market

Has the rental market been hit with inflation?

Yes, the rental market is also feeling the squeeze of inflation. Bad news for renters. Rents have skyrocketed along with everything else in this country. Newly released data shows an increase in rents has gone up by an average of 10.2% nationwide. Single-family detached homes had a rental increase of
an average of 12.5% compared to September 2020. Certain parts of the country such as Miami have had a rent increase of 25%. According to recent reports from core logic, Miami saw the largest increase in rents followed by Phoenix and Las Vegas. On the bottom line of rental increases, we see cities like
Chicago, Philadelphia, Washington DC, New York City, and Boston. The growth in these cities was under 5%.

How Inflation Inflation Impact Mortgage Lenders And Borrowers

How Inflation Inflation Impact Mortgage Lenders And Borrowers

One question we get quite often is does inflation favor a lender or a borrower?

The short answer to this question is both. The current inflation and the bargaining power have led to a rise in average wages across the country. Inflation can help a borrower if the borrower was already paying on the debt before inflation occurred. Especially debt with a low fixed rate. Because you still owe the same amount of principal before the inflation occurred, any increased wages due to inflation will allow you to pay less of your total paycheck towards your debt. This only is a factor if your wages truly increase during the time of inflation, otherwise, this argument does not hold true.

Inflation can help a lender as well. When extending new financing or offering new loans, higher prices mean people will need more credit to buy the item. So increased housing prices will allow the lender to collect interest on more total money. Since borrowers are needing more money, they may pay interest for
a longer period of time creating more profit for the lender. Inflation will typically raise interest rates for lenders so their profits can remain steady with inflation.

When Will The Biden Administration Financial Crisis End

When will it end?

Normally consumers will not notice a slight uptick in inflation rates. However, the skyrocketing inflation of 2021 is noticeable to most consumers. It is not a secret that many Americans have lost all faith in the federal reserve banking system as well as the Biden Administration. They are currently blaming the inflation numbers on the COVID-19 pandemic. While the COVID-19 pandemic has been a factor for inflation, it is not the end all be all. If anything, in my opinion, it’s more of an excuse. For months the Federal Reserve has told us that the inflation is transitory (temporary). In my opinion, they used this term to justify keeping rates low and helping with public perception. But Americans have caught on to this excuse. Going through their everyday life, they have come to the conclusion that this inflation
seems to be sticky. Meaning we will have this inflation for the time to come. Until the supply chain and Covid are rectified, I feel like inflation is here to stay. Elected economists like to use certain measurements such as the consumer price index (CPI) to measure inflation. This can be a play on words as inflation
according to the Bureau of Labor Statistics excludes the costs of foods, shelter, and energy to skew their numbers favorably. The media will use terms most Americans do not understand such as easing, demand-pull / cost-push, CPI, WPI. I wish the issues of shutdowns, mandates, and labor force were used
to describe the current inflation issues. Since companies are needed to charge more to stay profitable due to factors like shipping costs, this cost is passed down to the consumer. Even when shipping costs go back down, businesses are likely to keep higher prices to make up for lost profits.

The team at Gustan Cho Associates is here to answer any questions you have with the current mortgage market. The world of mortgage information is vast, so please reach out to the experts for specific advice. You can reach Mike Gracz via phone at 630-659-7644 or via email at Our team is
here to help you qualify without lender overlays. Even if you have been turned down by your lender in the past, we encourage you to reach out to our team. If for any reason you are not able to qualify for a mortgage today, our team will work with you to qualify in the future. We are available seven days a week and after business hours to accommodate your busy lives. We want you to take advantage of these historically low-interest rates before they start to climb. If you or any of your friends have mortgage-related questions, please reach out to our team today.

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