Renting vs. Buying: Inflation’s Impact on the Decision

Renting vs. Buying: Inflation’s Impact on the Decision



The news that U.S. inflation has hit 7% not only makes people recoil at the sticker shock at the gas pump and in the grocery-store aisles but also leads to some questions about what’s the best housing option right now, buying or renting.

Although to some, it’s more what is the least painful option than what is “best.”

Buying a house has deterred some budget-minded people since the pandemic sent real estate into a frenzy. While the market isn’t as red-hot as it was a year ago, it still seems like a seller’s market. However, taking a wait-and-see approach on buying may no longer be the safer choice, with worrying inflation-fueled increases in rent.

How Does Inflation Affect Rent?


Inflation itself is not considered a bad thing by analysts. The Federal Reserve believes that its 2% target inflation rate encourages price stability and maximum employment. However, 2% is not where the U.S. is at.

Regarding the rise in “shelter” costs shown in the latest Consumer Price Index, it may be bad news but it’s not surprising news. Anyone who has a landlord is aware of the trend. A study showed rents for a one-bedroom jumping an average of 11.6% in 2021 and the average two-bedroom going up by 13.6% over the same period, according to Fortune.

The rent increase is … complicated. Increases are believed to be driven in part by a scarcity of supply. During the pandemic, when houses were being snapped up, properties for rent were converted into properties that could be sold (or turned into Airbnbs), particularly outside cities and in places attractive to the “laptop class.”

Another factor: Landlords who held back from increasing the rent through 2020 and much of 2021 are now trying to recover their losses. That could be why new leases are showing such sharp increases.

Of course, some people are more than satisfied with renting regardless. To make the best of things, they’re launching rental-friendly updates or renovations, many of them budget-friendly too. While rising food and fuel costs definitely put the pressure on, these folks are working to keep their rent expense at the desirable percentage, which is no more than one-third of take-home pay.

The Advantages to Buying a House


In 2020, stories circulated of frenzied bidding wars for houses. Hours after a property went on the market, buyers were offering figures way over the asking price. To some degree, these days are over. For one, a great deal of desirable stock is gobbled up. Supply-chain issues and labor shortages have slowed down new construction.

Where does this leave first-time home buyers? Danielle Hale, Realtor.com’s chief economist, told The New York Times last August that there are more entry-level homes for sale. “I still wouldn’t say those homes are plentiful, but there’s more of them for sale now than there was a year ago,” said Hale.

The inflation spike – one that’s seeing prices rising at their fastest pace in 40 years – is leading some people to say buying real estate is the smart move. A flurry of headlines over the last few months remind us of the adage “real estate is a hedge against inflation.” This means for someone considering selling their house, the temperature could be warmer than ever.

As for buyers, interest rates have stayed near zero throughout the pandemic. This definitely encourages more applications for mortgages and refinancing.

The question is, what will happen if the Fed raises interest rates? Fed Chairman Jerome Powell recently indicated the central bank could raise interest rates this year as the U.S. economy didn’t need emergency support any longer.

If that happens, it’s possible that mortgages could have more issues, say some observers. But others say higher interest rates could lead to demand for new housing, and a very welcome boom would begin.

The Takeaway


A 40-year high in inflation spells bad news for renters, since a rise in “shelter” costs is prominently mentioned in the new Consumer Price Index. The time may be right for buying a house, with interest rates remaining low and the red-hot real estate market cooling a bit.

Explore competitive mortgage rates and learn about the new flexible terms and down payments as low as 3% for first-time homebuyers.

Learn More

Photo credit: iStock/Shutter2U


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Nancy Bilyeau ABOUT Nancy Bilyeau Nancy Bilyeau writes about student loans, mortgages, car insurance, medical debt and many other finance topics for SoFi. A veteran of the magazine business, she has edited stories on personal finance for Good Housekeeping and DuJour magazines and has written articles for The Wall Street Journal, Readers' Digest, Parade, Town & Country and Lifetime/A&E, among others. She is a graduate of the University of Michigan.


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