Housing Market Prices: 5 Big Reasons Inflation Could Lead to Prices Dropping

Over the pandemic, the US government fought hard to avoid financial fallout and lower economic output by boosting the economy with stimulus checks and financial support measures. However, the result was that inflation started to get out of control.

Reasons Inflation Will Lead to a Fall in Housing Market Prices

Here are five reasons why this could mean there's might be a fall in housing market prices.

1) More Expensive Mortgages

The biggest reason for the link between rising inflation and falling prices in the housing market isn’t due to the inflation itself — instead, it’s the reaction to the inflation.

When the funds rate is higher, it affects banks, so other interest rates rise to compensate, including mortgage rates.

When the funds rate is higher, it affects banks, so other interest rates rise to compensate, including mortgage rates. This all helps to discourage borrowing and spending, keeping inflation low — and possibly even resulting in deflation, which is why it could result in lower house prices.

2) Reduced Demand for Houses

As mortgages become more expensive, it becomes less appealing to take one out in the first place, as we’ve seen already.

The pandemic saw a sharp rise in people purchasing properties after thinking they had the perfect window of opportunity to get onto the property ladder or move house.

3) Smaller Pool of Potential Buyers The effect of the rise in the federal funds rate on demand is two-pronged. On the one hand, the higher mortgage prices are likely to reduce demand for houses directly — but also, rising inflation has increased the cost of living, meaning there’s a lower number of people who can afford a home right now.

Even a few months ago, it might have seemed feasible for the average person to put a few hundred dollars aside each month to save for a home deposit.

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