How inflation affects your ability to buy a house ~ very likely more than you think

If you’ve been watching the news, you know that housing inflation has far outpaced the rate of inflation in the rest of the economy.

In the Portland metro area, home prices have been rising 10% – 20% annually since 2012. In 2016 the average house increased in value 11.4% and average home prices have increased from just under $350,000 at the end of 2015 to just under $400,000 as of the end of 2016. Have you managed to save for that type of inflation? If you add to that the increase in mortgage rates in just the last year, from around 3.625% at the beginning of 2016 to 4.25% as we start 2017.
how inflation affects monthly paymentsTo put this into more perspective for you, let’s assume that you first started thinking about buying a house in January 2016 with a maximum purchase price of 300,000. With inflation that house will very likely cost you 11.4% more (average value increase for 2016) so you should now expect to pay approximately $334,200 for the same or an equivalent house.

So your required minimum 5% down payment has risen from $15,000 to $16,710. That’s not too bad and certainly doable for most people. BUT… mortgage rates have risen about .625% at the same time. So check out the chart above to see what has happened to your monthly payment based on increased value and mortgage rates. It has increased from about $1300 just a year ago, to $1560.93, You are looking at an increase of $261.18 increase in your monthly payment! Do you still qualify at this new monthly payment?

Unfortunately, all too often buyers focus on how much more money they need for the down payment without taking into account how the increased purchase price will increase the mortgage amount AND if rates rise at the same time, can have a MAJOR affect on the monthly payment. This combination will cause many buyers to be priced out of the market.

The solution is one that you might not like, but IF you are already priced out of your market or the increased monthly payment feels uncomfortable for you, perhaps you might seriously rethink your “must have” list. Clearly in this type of market it is very difficult for the average home buyer to keep pace with this double whammy inflationary environment.

But, prior to this most recent environment, most first time home buyers particularly, were not thinking of forever. They just wanted to get into a house. Perhaps it’s time to return to that type of thinking and just get into a house. You’ll not only save money on your monthly payment, but also on your annual taxes. That gives you more opportunity to save at a much faster rate for that “must have” list you want in your forever house.

In Portland Oregon, we have the ideal environment for home values to continue to rise, regardless of mortgage rates.

  1. Employment is strong
  2. We are and have been one of the strongest housing markets nationwide
  3. Housing inventory is dismally low (at only 1.3 months as of December 2016)
  4. Migration into Portland is so high that our population is growing by approximately 150 people or more every single day.
  5. Our rental market is so bad that it is actually cheaper to own a house than rent.

Perhaps most importantly, competition is fierce in our market.

You might also like to read How inflation affects your ability to buy a house ~ very likely more than you think

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