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The impact of inflation

There's little relief in sight for homebuyers

By Debora Batchelor

If you’ve purchased anything from groceries to a car lately, you’ve probably noticed that inflation has been on the rise. Put simply, inflation is an increase in prices. When the price to buy goods or services, including mortgage loans, goes up, prices for other goods and services rise or fall in response. 

This year’s real estate market has been strong, and despite COVID-19, demand has increased in the housing market, which includes construction of personal residences and spec homes. I believe this is due to the combination of government support, low interest rates and the increased number of homebuyers. 

Low interest rates, in my view, are the main factor driving the upward inflation trend in the housing market. Many buyers are looking to lock in their monthly payments by taking advantage of low mortgage rates. 

Given the demand in the housing market, I see home prices rising. The increase in prices and the decreased availability of homes could make purchasing homes difficult well into the future. As far as home construction, the price of building materials is a perfect example of inflation. Lumber prices increased by more than 300 percent during the pandemic, and while it has dropped considerably in the last month, it is still approximately 75 percent more than in 2019. 

As inventory continues to decrease, there will be little relief in sight for homebuyers. Before the cooling-off trend begins this fall, the median home price is predicted to reach new highs in the coming months. This year, more homeowners are listing their houses for sale, resulting in a record-high percentage of homes for sale being “new listings.” While the flood of sellers will help alleviate some of the competitive pressure, buyers must still make offers that are strong enough to win out in a multiple-bid scenario. 

Low rates give borrowers more buying power, and a significant decline in mortgage rates can help push up home prices — as witnessed in recent months. If mortgage rates continue to rise in 2021, affordability is likely to become a bigger challenge. The combination of intense demand and low mortgage rates has pushed home prices to levels that are making it difficult to save for a down payment, particularly for first-time buyers. 

Building will continue, and new homes will pile up a bit, which will slow down the rate of price appreciation. However, there are reasons to believe that the housing market will remain tight in 2021 and 2022 because there are first-time buyers entering the market. 

Debora Batchelor is vice president of The Peoples Bank. Reach her at (228) 255-4450 or 

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