Inflation and its Effects on the Bay Area Housing Market

With inflation rates rising to nearly 7%, many are concerned about managing their finances most wisely and whether buying real estate is the best option in an inflationary period.

Keep reading for a summary of what experts say about the affections of inflation on the Bay Area housing market.

Inflation Rates

It’s no secret that the past year’s inflation rates have been higher than usual. With a target rate of 2.5%, rates had remained at or below 2% since 2012 until last year, when they spiked to 7%.

Many consumers are concerned about how this affects the cost of living and what will happen to the real estate market.

Bay Area Housing Trends

The Bay Area has long been a hot real estate market, with an extreme imbalance in supply and demand. Experts have no reason to anticipate a slowing of orders as inventory remains low. Even with the expected rising interest rates, the need for homes in the Bay Area will continue to outpace supply significantly.

Are Mortgage Rates and Inflation Related?

Short-term inflationary periods do not generally significantly impact mortgage rates. This relates to multiple factors: mortgage lenders anticipate the next 15 or 30 years, depending on the mortgage term.

Dennis Brand, vice president of growth for Mynd, says, “Thirty-year mortgage rates reflect what the market thinks rates will be over the next ten years. People don’t expect 6 percent inflation to last the next ten years.” Many experts forecast that the Fed will see inflation rates back closer to the 2.5% target next year, so there is no reason to expect massive changes from mortgage lenders.

How Does Inflation Impact Housing Costs?

Nearly everyone knows the rising cost of homes nationwide and in the Bay Area. This growth in housing prices preceded inflation, which is to be expected because the value of a home is far more dependent on supply and demand than inflation.

The pandemic sent many families searching for a new home base in a suburb. This wave of new demand for housing in suburban markets significantly impacted housing costs.

Inflation effects that impact housing costs include rising building material costs and labor shortages.

Is Now a Smart Time to Buy?

Buying real estate is promoted as a hedge of protection against rising inflation rates. By purchasing a home in the Bay Area, you reasonably anticipate that this large asset will grow at a rate equal to, or more likely faster than, inflation rates.

Some experts call real estate a refuge during a season of inflation in America. Investing in real estate during an inflationary period has multiple advantages, including:

They increased potential income from investment properties. As inflation increases, rent prices will rise with the market. Investing in income properties in this scenario likely means a steadily increasing income stream.
You are locked in mortgage payments. If you are buying your residence, purchasing a home means stabilizing the largest factor in your cost of living against inflation. As rent prices rise, your mortgage payment will not. This is especially true if you select a fixed-rate mortgage insulated from changes in interest rates and rental costs.
Inflation increases demand for rental properties. As inflation rises, the high demand for rental properties will grow. This means the value of your home as an income property or its resale value will grow with the market.