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Inflation and the Florida Housing Market - What to Expect

The US economy has rapidly shifted since the beginning of the year as the Federal Reserve hiked the interest rates by half a point.

Though the housing market remained strong, it is still affected by economic factors such as inflation. During inflation, consumers pay more for products and services due to a surge in their demand.

There has been a lot of speculation and talk in the news lately about inflation and the housing market. Most mortgage experts say that it isn't easy to know what the future will bring.

However, it would be best to understand how inflation in the housing market works, the best way to hedge against this situation, and how it can affect your investment.

High inflation causes a hike in the prices of rental properties. It isn't easy to afford a mortgage at this time. Between the high borrowing and building costs, investing in new construction can be challenging during inflation.

Rampant and continued inflation negatively affects the economy on a personal and large scale. So, what should you expect from inflation and the housing market?

Impact of Inflation on Home Prices

Although there's no correlation between home prices and interest rates, low rates result in high housing demands. Consequently, high demands call for high home sale prices.

A similar pattern is expected to unfold later this year, with mortgage interest rates rising further and housing prices growing at a slower pace.

Mortgage experts expect to see a market normalization as housing supply and demand conform to each other. Housing prices won't go down soon and won't also grow exponentially.

The bottom line is that when housing prices fluctuate, mortgage borrowing becomes difficult, credit standards get tighter, and demand increases.

What this Means to Homebuyers and Investors

Inflation favors property owners since they profit from building, leasing, or selling properties. Home values rise with the inflation rate, pushing for high rental fees or sales prices.

With high demand and low supply, sellers have the freedom to assign high asking prices on properties. Selling a property during inflation is lucrative while buying one at the same time is quite challenging and costly.

The financing rates are low in a market characterized by inflation. If you hold a residential property as an asset, you may have to pay the same fixed rate even when its value steadily increases. For investors, returns on investment (ROI) can soar in an inflationary market as the property's value increases.

Thinking about investing in housing during inflation is a good idea. However, you should note that your circumstances will differ from those of existing homeowners. Therefore, you should decide the length of time you plan to own that property.

Investing in a property in the long-term in an inflationary market is lucrative. Expect to see an increase in the property value as demands surge and supply remains constant. If you consider making a short-term investment, do so with caution since it can be hard to predict the ROI.

Inflation and Affordability

Home affordability is bound to decline since most consumers have less purchasing power during inflation. Affordability, in this case, is relative and isn't affixed to mortgage rates and listing prices.

Inflation also causes rent prices to increase in the long run, making homeownership a cost-effective alternative to renting.

When shopping for a new home, you may direct most of your attention to the sales price. It's essential to count a property's fixed payment, equity appreciation, and potential tax benefits. Through homeownership, you get to build equity while servicing your loan.

You can cope with inflation by improving your credit score, adjusting your house budget, and buying a house sooner.

Thinking beyond a 30-year fixed-rate loan and looking out for housing market trends and predictions can also help your situation.

Will Inflation Crush the Housing Market?

As high inflation in the housing market throughout 2021, many people are concerned about whether the market will crash. It's irrational to compare the current inflationary situation to the 2008 mortgage crisis.

Unlike the 2008 crisis, where mortgage lenders were blamed for advancing loans to high-risk and less creditworthy borrowers, the current situation is driven by supply and demand forces.

There is a high likelihood of home price growth slowing down later this year.

A market crash will be highly unlikely since there are precautions at hand by lenders, originators, and borrowers to prevent this from happening. Act soon when looking to buy or refinance a home to spend less money in the long run.

As the Federal Reserve announced interest rate hikes, the refinancing window for borrowers is quickly closing. Some buyers will even be locked out since they will not be able to afford home loans.

Rising interest rates may have positive impacts in the short term since they create more buying opportunities. Though most borrowers with bad credit will be locked out, those with good credit will find a property, buy and close.

What Circumstances will Lead to a Crash in the Housing Market?

Though there won't be any large-scale collapse of the housing market, certain circumstances may prompt one. The crash will happen if the economy fails to stabilize despite the efforts of key players trying to make the cost of items more affordable.

Any volatile instances in macroeconomic factors such as employment and consumer confidence can put the housing market at risk of a crash. The housing market will drastically slow down when these factors come into play.

While you shouldn't expect a housing price crash like the one witnessed in the 1990s or 2008, a flatlining or dip is highly likely.

The housing market will stay hot since more borrowers are less likely to default on home loans and the millennial demand for housing rises.

Miniature house on coins stack

Expert Mortgage Rate Predictions

The Federal Reserve's May meeting spiked countless debates from mortgage experts.

Most concerns were raised over the decision of the Federal Open Market Committee (FOMC to increase the key interest rate by 50 basis points (the highest rate rise in over two decades). There's hope that the Federal Reserve will get the high inflation under control.

Mortgage rates grew yet again, with the average 30-year fixed interest rate increasing from 5.27 percent on 5th May to 5.30 percent on 12th May 2022. With these numbers, the interest rates will likely grow further in 2022.

Interest rates may trend upward with the Federal Reserve hikes, inflation at 40-year highs, and the declining economy brought by the pandemic. However, industry leaders and experts from leading mortgage corporations have various things to say about these rates.

Mortgage Rates are Predicted to Rise

The 30-year fixed mortgage rate will likely increase to an average of 5.2 percent next month. Interest rates may rise slowly as they do currently as inflation starts to slow down later this year. According to Nadia Evangelou of the National Association of Realtors, the rates are expected to rise.

Mike Fratantoni of the Mortgage Bankers Association predicts that the rates will rise. According to him, since the employment rates are high and the inflation rate is over 8 percent yearly, the Federal Reserve is likely to continue hiking the rates in 2022.

The Federal funds rate will likely reach a limit between 2.25 percent and 2.5 percent before the end of the year, while the rate hikes will prevail through mid-2023.

Mike believes that the Federal Reserve will announce plans to minimize their MBS and Treasury holdings size later on.

This move will amount to reductions of about $95 billion a month and make the mortgage market more volatile. It will also keep mortgage rates elevated.

The Federal Reserve's hikes pushed Treasury yields higher and made mortgage rates volatile. To Mike, the 10-year Treasury yield will likely end at 2.8 percent in 2022 and stick to these levels through 2023.

The yield is expected to fall to 2.5 percent in 2024, while the mortgage rates at the end of 2022 will be at 4.8 percent (declining gradually to 4.6 percent by 2025).

Odeta Kushi of First American is confident that even though the rates will rise, the path to this reality may be filled with obstacles. She believes that the Federal Reserve is sending a clear message to tame inflation.

Additionally, the Fed is predicted to start minimizing its balance sheet by mid this year and consider selling agency mortgage-backed securities (MBS).

The MBS sales will inflict upward pressure on interest rates. Mortgage rates may fluctuate daily or weekly due to the ongoing uncertainty but remain up.

Mortgage Rates are Predicted to be Moderate

Daryl Fairweather, a chief economist at Redfin, is confident that the rates will be moderate. The rates are already up to mirror the Federal Reserve hikes.

They may rise more if adequate measures aren't used to control them. If the Fed controls inflation, expect interest rates to drop moderately.

Selma Hepp of CoreLogic predicts that the interest rates will be moderate as runaway inflation expectations are getting the attention of the Federal Reserve.

The Fed has been aggressive in acknowledging this inflation, and as a result, mortgage rates have risen significantly above the levels most people expected.

According to Selma, the demand is beginning to negatively affect the higher rates and slow mortgage rate increases in the future. She believes that the rates will remain around the 5 percent range.

What Borrowers Should Do

You should act fast when looking to buy a home if the interest rates hike the same way the federal funds rate is set.

But what should you do when you think the rates would be lower this year to make homeownership affordable? Also, how should you cope with the market when you expect a housing crash due to high inflation?

Luckily for you, you can still find low mortgage rates on the market. That's because rates are still relatively low (even when they rise to 4 percent), allowing you to find home financing.

As the rates are pretty low compared to the previous decade, lock in a rate early before increasing further to make long-term loan savings.

Though the growth pace of mortgage rates is expected to slow, the rates may rise through the rest of 2022.

The good news is that you can still find lucrative opportunities to lock in a low-interest-rate mortgage when looking to buy or finance a home. Here are some of the strategies to use in this pursuit:

Lock in a Rate Sooner

It is predicted that the Federal Reserve will raise its federal fund's rate target during each of its six remaining meetings by the end of the year.

The hike in the federal funds rate is a strategic move to help the central bank counter high inflation, which is at a historic high. Mortgage interest rates will increase in response to the hike.

After the FOMC meeting back in March, the average 30-year fixed mortgage rate increased by 31 basis points (0.31 percent). The May meeting also led to a spike in the rates. It's beyond doubt that the same will happen during the June meeting.

Now is the time to lock in an interest rate on a home loan to begin your home journey. This is because mortgage rates tend to be volatile daily or weekly. There are also enough indicators pointing to them increasing throughout the rest of 2022.

If you want to refinance or buy a home, you are in better luck if you lock in a rate sooner. Line up all your paperwork and get pre-approved for a loan product of your choice.

Choose a Lower Rate for Yourself

It's no secret that the current mortgage rate environment makes home affordability a challenge. However, you can use the situation to secure a better mortgage rate.

Getting the best interest rate for your financial situation will take a little work. While the growth rate environment hurts affordability, you can also use it to your advantage.

Mortgage lenders need borrowers like you to stay in business. In this case, they are likely to compete for your business when more borrowers are finding home loans costly. After getting a pre-approved rate from one lender, shop around and compare the offers for the best deal.

Comparing rates will help you find a lower rate and lock it before the rates fluctuate. As a result, you will potentially save thousands of dollars on the course of your home loan.

Expand Your Home Search

Your house-hunting strategy should reflect the current inflationary housing market. You may consider checking out smaller properties or looking for homes in less in-demand areas.

Either way, you should tread carefully since building materials and labor are on the rise too. Buying a house that needs renovation will also be costly once you account for the materials and labor.

Take a hard look at your housing budget and figure out your final home price. You need to understand when to walk away when a particular property doesn't suit your budget or structural preferences.

Improve Your Financial Situation

With a high credit score, you can beat most lenders' eligibility requirements and qualify for a mortgage. You also enjoy a low down payment, and many lenders will compete for your business.

You can raise your score by paying down debts, avoiding late payments, and fixing any mistakes on credit reports. Requesting a higher credit limit and minimizing your credit card balances can also improve your financial situation.

Making a more significant down payment may qualify you for a home loan amidst the high-interest rates. The big down payment will reduce the lender's risk in loan origination. You can also use it as a form of protection if home prices decline.

The Bottom Line

If you want to buy a house, there's no perfect time to get one provided you can secure an affordable mortgage. As the national economy tries to stabilize, the last thing mortgage lenders and borrowers will expect a housing market crash.

Though the crash is difficult to predict, the current rate of inflation is a concern that homebuyers and investors need to consider carefully.

Otherwise, you will have to wait until the housing market favors you to afford your dream home. Regardless of what you decide, it's crucial to have your finances for a stronger financial status in your homeownership journey.

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