Inflation is a red-hot topic right now, and for good reason: In October, the annual inflation rate rose to an alarming 6.2%. That’s the highest it’s hit since November 1990, over 30 years ago, and a steep uptick from the manageable 2% that we’ve enjoyed for the past five years.

Translated to your daily life, this means Americans are shelling out more money for just about everything, from gas for your tank to heating bills to groceries and more. Our money simply doesn’t go as far as it used to.

So what’s the impact of inflation on housing?

Not surprisingly, inflation is influencing the real estate market in a big way, too. According to a Stanford University study, residential real estate has historically been an “investment safe-haven” during inflationary periods. Researchers found that during the 1970s (another moment of surging inflation), home prices rose relative to the size of the economy. This was good news for homeowners and real estate investors, since it meant that their home’s rising value helped offset rising prices elsewhere.

• If you were shopping for a new home, though, this was a major challenge—and the same may hold true today.

What is inflation, and what causes it?

Simply put, inflation is when the prices of goods and services rise, thereby decreasing the purchasing power of the money you have to spend. Right now, several factors are contributing to inflation. First, consider the impact of government aid during the COVID-19 pandemic.

As the government supported American households and provided [financial assistance], that gave many people more purchasing power,” explains George Ratiu, manager of economic research at Realtor.com®. “But a lot of Americans could work remotely and didn’t need to spend on, say, takeout lunches at the office, commuting and parking, dry cleaning, and other expenses. So companies on the supply side of those goods and services needed to charge more since they had fewer customers.”

Another factor contributing to inflation today: the supply chain issues occurring around the globe. Manufacturing was disrupted due to the pandemic, as illness and lockdowns slowed business, and there continue to be significant problems with goods getting into ports. (The Los Angeles/Long Beach area is one oft-cited bottleneck, with so many products typically arriving there from Asia.) Trucking those items across America once they arrive has also been challenging since there are fewer people available to drive the 16-wheelers to get goods where they need to go.

What does inflation mean to homebuyers and sellers?

There’s no doubt that strong inflation will affect homebuyers’ budgets. The majority of buyers tend to finance a home purchase, which means they need a down payment and then must apply for a mortgage.

“Assuming they have a down payment, the mortgage payment will be a main determinant of what they can afford,” says Ratiu. “Mortgage rates tend to move in tandem with inflation, so mortgage rates will rise. The Fed has been a principal purchaser of mortgage-backed securities, but that will wind down by April 2022, driving rates higher. By late November, Freddie Mac rates went up to 3.10%, meaning that today’s buyers of a median-priced home will spend $160 a month more on their mortgage payment, which is a noticeable impact.”

For home sellers, the current tight market can be a good time to reap a profit—provided that postsale, they can find somewhere affordable to move. If the house you bought for $200,000 is now worth $300,000, that’s terrific. But if you sell and want to stay in the area, can you afford to buy what you want, or has inflation decimated your spending power? It’s an important question to ask.

How long will inflation last?

As inflation eats away at homebuyers’ spending power, many may be wondering: When will things get better?

“My prediction would be most places will see higher prices for housing as we untangle supply chain issues,” says White. “We are also reconciling with trends in consumption going back 50 years. People had been shifting from spending on goods to spending on experiences—going to the gym, dining out, taking a cruise. COVID-19 totally reversed that. Who wants to go to a restaurant or movie during a pandemic

But if things shift and we do spend more on services, that will help untangle supply chain issues,” says White. “There will be less demand for goods at bottlenecked ports.”

Once that happens, inflation should abate and allow homebuyers to return to their pre-pandemic budget.

The other big question that will affect the real estate market is where mortgage interest rates go next. A lot of that depends on what steps the Federal Reserve takes.

“The 30-year mortgage rate could rise to 3.7% by the end of next year from the current 3%,” says Yun. As a result, some buyers will no longer qualify for mortgages at higher interest rates. They will have to either take their spend down a notch or sit on the sidelines for a while as the market becomes too pricey. For homebuyers who have extra cash on hand, this will be a good time to jump into the market as they look to hedge against inflation during this moment when money isn’t going as far as it used to.

While state governments license real estate agents, NAR has an extensive code of ethics it expects members to adhere to. NAR and the brokerages have vowed to appeal the verdict, which means real estate commissions aren’t going anywhere immediately.

NAR has been fighting off US antitrust officials and litigation for years regarding anti-competitive practices, and this verdict is the association’s biggest setback yet. This verdict is just from one of several lawsuits currently filed against NAR, which is also facing scrutiny from the US Department of Justice. NAR has already faced a difficult year, setting aside the verdict and the troubled housing market.

In August, the NAR president, a member agent named Kenny Parcell, resigned amid sexual harassment allegations. Last month Redfin, an internet real estate company, left the association

On the commissions, NAR has said they will appeal the verdict and that the issue won’t be resolved for years.

“This matter is not close to being final as we will appeal the jury’s verdict,” said Mantill Williams, NAR vice president of communications. “In the interim, we will ask the court to reduce the damages awarded by the jury.”

“This is not the end,” said Darryl Frost, spokesperson for Keller Williams.

What was the case about?

The cornerstone of the plaintiff’s argument is that NAR is forcing homesellers to pay an inflated commission that is then split between their agent and the buyer’s agent. The homesellers argued commission sharing as a condition for access to the Multiple Listing Service was unfair and kept commissions artificially high.

Typically, when a home goes on the market for sale, the seller offers their broker a set commission. For decades, the commission has consistently been around 6% of the sale price, usually with a 3% split for the buyer’s and seller’s agent.

In a competitive market, the homesellers argue, the cost of the buyer’s agent’s commission would be paid not by the seller, but by the buyer who received the service. The sellers said that the buyers should be able to negotiate the fee with their agent, and that the sellers should not be on the hook for paying it.

NAR and the other defendants argued in court that their commissions are always negotiable. They also said that the system of having the seller’s agent split the commission with the buyer’s agent allows buyers, who are already weighed down with expenses like a downpayment, closing costs, inspections, and appraisals, to avoid the added expense of having to pay an agent as well.

Consumer advocates celebrated the verdict and hoped that plaintiffs would also receive their request for the judge to order changes to how commissions are structured in the industry.

While already large, the award could grow even more—to a total of $5 billion, depending on what the judge decides.

The jury clearly saw the industry had restricted price competition to a point where it could ensure nearly uniform 5%–6% commissions, said Stephen Brobeck, a senior fellow at the Consumer Federation of America. Jurors made their decision quickly, he said, deliberating for only a few hours.

“The extent of injunctive relief decided by the court will strongly influence whether a price-competitive system develops that lowers consumer costs and increases the quality of services,” Brobeck said. “We hope that the court will sever the ties between listing agent and buyer agent compensation, freeing sellers from the obligation and need to compensate buyer agents.”

Impact of commissions on buyers and sellers

Not much is expected to change in the near term with regard to how commissions are set, agents say.

The longer-term impact of the verdict may be that the pairing of buyer’s agent commission and seller’s agent commission will eventually be separated.

New homeowner Lina Andersen purchased the Oakland, California, house she and her husband had been renting when the owner told them earlier in the year he planned to sell it. “Being priced out never really dawned on me,” she said. “But the rental market in that pocket of Oakland had just been booming.”

Andersen, who works in public education, and her husband, a merchant marine, worried that they would be forced to move for the second time in three years as property owners cashed out in a rising market. Displaced in 2018, they found their current home, but the rent was $1,100 higher — a prospect that made saving up for a down payment even harder. “Our rent was $3,800,” she said. “We had been saving as much as we can, but 20 percent on a lot of money is still a lot of money.”

The home, which the couple was able to purchase with financial help from family, needed a bit of work and didn’t have the scenic view its neighbors enjoyed, but Andersen viewed that as a small trade-off to be able to stay in the area and not have to uproot her two boys, aged eight and five. “As a parent, it was really emotional not having to tell them we have to move again because we can’t afford to stay,” she said.

The Andersens’ agent, Kumi Hodge, said he sees high demand, tight supply and rock-bottom interest rates propelling prices higher. “I’ve noticed more calls about folks wanting to get out of their small apartment and getting a place with a yard,” he said.

Hodge, an Oakland native, said this shift makes it challenging for people to stay in the neighborhoods where they grew up. “I can’t afford any homes that I would live in in my own neighborhood. I’m making a solid income and I still can’t access the homes that are local to me.”

Nationwide, the median home price in June rose to $295,300, driven by low inventory — a factor influencing the market even before the pandemic — and pent-up demand, said Lawrence Yun, chief economist for the National Association of Realtors. “Home prices rose during the lockdown and could rise even further due to heavy buyer competition and a significant shortage of supply,” he said.

“Many households have continued to work through the pandemic and maintained their purchasing power. It’s really those households that are doing well that are fueling this demand,” said Chris Herbert, managing director of the Harvard Joint Center for Housing Studies. “This pandemic has tilted the scales towards suburbs.”

This dynamic can mean a windfall for sellers. “I was surprised by the number,” said Lisa Kolton, a social worker in Montclair, in New Jersey, who got an offer for more than $160,000 above her asking price in less than a week. Kolton said she believed that COVID-19, which has made roomier homes with backyards in the suburbs more appealing, was motivating city-dwelling buyers.

“I was anticipating that it would go fast but my realtor was also really surprised by how high it went,” Kolton said. “She told me there were 50 buyers looking at four or five houses, including mine, over the past weekend.”

The sense of urgency buyers report feeling stems from a few factors: The quest for more space as work-from-home and remote learning increasingly look to be longer-term phenomenon, social distancing constraints that dampen the appeal of public spaces such as pools and parks, the speed with which other buyers are willing to make offers, and a desire to lock in record-low interest rates.

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“I’ve always loved being in the busy part of Indianapolis, but when COVID happened, suddenly things became less walkable and our living space of 675 square feet felt a lot smaller with two people living and working in the same place,” said Elise Moote, who bought a house in a more suburban neighborhood earlier this month with her fiancee.

Even far from the hot spots of coastal metro areas, Moote said it took a while to get an offer accepted. “The market in the area we’re in is still really competitive. The day before we put an offer in on this one, we had an offer on another home declined,” she said.

But increasing sales, quicker turnover and rising prices also help drive up rental rates — which makes it even harder for the families who don’t already have a foothold in the real estate market. Real estate data analytics firm CoreLogic found that the average rent for a single-family home in May rose by 1.7 percent on an annualized basis. Although this represents a drop from the roughly 3 percent increase of a year earlier, rents on the cheapest homes still rose by 2.8 percent across the board.

Some renters say that staying in their neighborhoods — or even their homes — is getting tougher.

Ventura County, Calif. resident Alexandra South was shocked to see a $400 monthly rent hike when her lease is up for renewal in August. “It just didn’t seem like the time or place to be instituting that kind of thing,” she said. “Even in normal circumstances, it’s a ridiculous increase.”

South and her husband, who have a two-year-old daughter, both work in the public sector. “At the end of the day I feel extremely fortunate that we’ve been in a position of employment,” she said, but she added that a rent hike on top of the $3,250 the couple already pays diminishes their ability to save for a down payment. “The prices are so high here. We have student loan debt and some other personal debt that would make it hard to save that kind of cash right now,” she said. “We weren’t quite ready.”

The more prices rise, the greater the number of households who see their window of opportunity to own a home closing, said Tom Forker, senior vice president and area market manager at Bryn Mawr Trust.