Sep 235 min read

#7 In the series: Politics and Real Estate: Politics and Real Estate: Inflation Concerns and Its Impact on the Housing Market

Updated: Sep 24

Inflation is one of the most pressing economic issues that impacts real estate, making it a key topic in the 2024 election. Inflation affects nearly every aspect of the housing market, from construction costs to household budgets, mortgage rates, and ultimately home prices. The policies proposed by political parties and elected officials will play a crucial role in determining how inflation is managed and its long-term effects on the real estate market.

1. How Inflation Impacts Real Estate

Inflation increases the cost of goods and services, affecting the overall economy and the housing market in several ways:

Construction Costs: Inflation pushes up the price of raw materials, labor, and construction equipment, making it more expensive to build homes. This leads to fewer housing developments and higher home prices, especially in high-demand areas.
Higher Mortgage Rates: Inflation generally causes the Federal Reserve to raise interest rates to control the money supply. This directly impacts mortgage rates, making home loans more expensive and reducing purchasing power for potential homebuyers.
Household Budgets: Inflation affects day-to-day expenses, such as food, utilities, and gas. With households spending more on essentials, less income is available for mortgage payments or saving for a down payment.

According to Freddie Mac, the average 30-year fixed mortgage rate was around 3% in 2020. As inflation rose, mortgage rates spiked to over 7% in 2023, significantly raising the cost of homeownership.

2. Republican Proposals on Inflation and Real Estate

The Republican Party generally advocates for policies that aim to curb inflation by controlling government spending, reducing regulation, and lowering taxes. Their approach to fighting inflation is rooted in supply-side economics, with the belief that a strong private sector will stabilize prices by increasing supply and competition.

Key Policies:

Reduced Government Spending: Republicans argue that the government should reduce spending to limit the growth of inflation. By curbing federal expenditures, they believe inflationary pressures can be reduced, which would help keep interest rates low and stimulate the housing market.
Tax Cuts for Businesses: Republicans propose tax incentives for businesses and developers to encourage more housing construction. Reducing the corporate tax rate, they argue, would make it cheaper for businesses to operate, helping ease supply chain issues that drive up housing costs.
- Example: In 2017, Republicans passed the Tax Cuts and Jobs Act, which reduced the corporate tax rate from 35% to 21%, boosting business investment in real estate.

Funding Sources:

Republicans seek to address inflation without adding to the national debt. Their approach focuses on private-sector solutions, funded through tax incentives and deregulation, rather than relying on increased federal spending.

3. Democratic Proposals on Inflation and Real Estate

The Democratic Party generally supports more active government intervention to manage inflation and its impact on real estate. Democrats advocate for expanded social programs and affordable housing initiatives.

Key Policies:

Affordable Housing Investment: Democrats propose increasing government funding for affordable housing projects. By boosting the supply of affordable homes, they believe they can counteract the inflationary effects that drive up home prices.
- Example: The American Rescue Plan allocated billions to housing assistance programs in response to the economic pressures of the COVID-19 pandemic.
Rent Controls: In cities facing rapid rent increases, Democrats have called for more widespread use of rent controls to protect tenants from inflationary pressures that lead to unaffordable rents.
Infrastructure Spending: Democrats also argue that by investing in infrastructure, such as roads, public transit, and energy-efficient housing, the government can reduce the overall cost of living and make real estate more accessible.
- Example: The Inflation Reduction Act of 2022 aims to lower costs for families by reducing energy bills and investing in clean energy, which could stabilize housing-related costs over time.

Funding Sources:

Democrats propose funding their initiatives through increased taxes on higher-income earners and corporations, continuing the party’s platform of redistributing wealth to support social programs. They argue that this approach will stabilize inflation while protecting the housing market from rapid price increases.

4. The Impact on Homebuyers and the Real Estate Market

The policies proposed by both parties will have a direct impact on homebuyers and the real estate market, especially as inflation continues to shape the economy:

Rising Interest Rates: Higher inflation typically leads to higher interest rates, which increases the cost of mortgages. This disproportionately affects first-time buyers, who may struggle to qualify for affordable home loans as rates climb. For example, a family buying a $400,000 home at 3% interest would pay around $1,686 per month, while at 7%, the payment jumps to $2,661 .
Construction Slowdowns: Inflation increases the cost of building materials and labor, slowing down housing development and limiting the supply of new homes. Both parties' policies on inflation and housing will influence whether new homes come to market quickly and at affordable prices.
Household Budgets: As inflation erodes purchasing power, potential homebuyers will have less disposable income for mortgage payments, down payments, and home maintenance. Government policies on inflation control will determine how much relief buyers receive, especially if inflation continues to rise.

Conclusion: Inflation and Real Estate in the 2024 Election

Inflation has become a defining issue in the 2024 election, with both Republicans and Democrats proposing different solutions to manage its impact on the real estate market. Republicans advocate for reducing government spending, cutting taxes, and deregulating the private sector to lower costs. Democrats, on the other hand, emphasize expanded government programs, affordable housing initiatives, and increased taxes on high earners to control inflation and protect vulnerable homebuyers.

As inflation rises, mortgage rates tend to follow, increasing the cost of borrowing for homebuyers.
Construction costs have also spiked, driving up the price of new homes and making the real estate market even more competitive.

Ultimately, how inflation is managed in the coming years will directly affect the affordability of housing, mortgage rates, and the overall health of the real estate market.

Sources:

Freddie Mac – "The Impact of Rising Mortgage Rates on Homebuyers," Freddie Mac.

The Brookings Institution – "The Role of Inflation in Real Estate Markets," Brookings.

National Association of Realtors – "Inflation and Its Impact on Real Estate," NAR.

These inflation rates reflect the rise in prices across the economy. The sharp spike in 2021 and 2022 was largely driven by pandemic-related supply chain disruptions, rising demand, and energy costs.

U.S. Bureau of Labor Statistics (BLS) – Consumer Price Index Inflation Data

Federal Reserve Economic Data (FRED) – Inflation Historical Trends

Disclaimer: The information provided in this blog post is for general informational purposes only and does not constitute financial or legal advice. All mortgage lending standards, policies, and regulations can vary based on location and individual circumstances. Please consult with a financial advisor, mortgage professional, or legal expert to better understand how these policies may affect your specific situation.