Supply and Demand Comes Into Play
Supply and demand influence prices. Even
if inflation is high, an oversupply of housing
will bring home prices down. Interest rates
and rental costs tend to go up with inflation.
Mortgage rates follow the same path as long-
term bond yields. If mortgage rates go up too
high, people won't take out home loans. De-
mand will decrease; home prices will fall.
Housing Is a Good Asset During Inflation
Housing is generally viewed as a good asset when it comes to in-
flation, in part because the home's value will rise with the inflation
rate and in part because it is a leveraged asset. So with a good in-
terest rate that doesn't change, the amount you pay for your home
may not increase although the value of it might. When you buy
real estate, you make a down payment of perhaps 20 to 30 percent
of the house price.
The house price rises by the rate of inflation times the cost of
the house, not by the cost of your down payment. So if inflation
doubled the value of the house, it may have quadrupled the value
of your down payment. If you took out a fixed-rate mortgage, you
have done even better because you are making a payment that
dropped in inflation-adjusted dollars. You are paying less for the
loan than you did when you took it out.
