05/10/2024
I have had a lot of client conversations lately about inflation and how it affects housing prices. Here is Chat GPt's take on inflation and housing.
Imagine you have a piggy bank where you keep your allowance. Each year, the toys and candies you want to buy with your allowance get a little more expensive. This is called inflation—it means things cost more than they did in the past.
Now, if you have a really big piggy bank like a house, inflation can actually help you if you borrowed money to buy it.
Here’s why:
Borrowing money to buy a house: When adults buy a house, they usually borrow money from a bank because houses cost a lot of money—more than most people have at once. They promise to repay this money to the bank over many years, say 30 years for this example.
What inflation does: Over time, the money that adults borrowed to buy the house becomes less powerful because of inflation. That means each dollar they owe is a little easier to pay back because they are paying with future money, which isn’t as strong as today’s money.
How the house changes in value: At the same time, the house they bought usually becomes more valuable. So, not only does the money they owe feel smaller, but their house is worth more than when they bought it!
Making money from the house: Because the house is worth more, and the money they owe feels smaller, they end up making money from having bought the house. It’s like if you purchase a toy that everyone wants, and then later, everyone is willing to give you more candy for the toy than when you first bought it!
So, the basic idea is that when people buy a house with borrowed money, inflation can help them because it makes their debt cheaper over time and their house more valuable.
The problem today is that house prices are outpacing homebuyers' ability to purchase a house. Household income is not rising as fast as home values.
