Retirement, Investments, & Insurance for Individuals Build your knowledge How the housing market affects your personal finances

How the housing market affects your personal finances

Demand, supply, and interest rates all impact not just your housing budget, but your ability to meet your financial goals.

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3 min read |

In 2021, there were some wild stories about bidding wars and scarce inventory for housing across the country. But the movements of housing and home prices can affect your own financial picture at any time.

The cycle of home prices

Every couple of decades, stretching back into the 1800s, there have been peaks and valleys in housing prices and interest rates that lead to speculation and higher price tags.1

“There’s a cyclicality to the real estate market,” says Heather Winston, assistant director of financial advice and planning at Principal®.

Those economic cycles bring welcome news for some—and less-welcome news for others. If you’re in the market to buy, inflated housing rates can make it hard to stay in budget. If you have a house but an adjustable interest rate on your mortgage, housing swings may forewarn a rise in interest rates.

Sometimes, those tradeoffs may be worthwhile. Buying something bigger, for example, may offer room for a growing family—though it requires an investment of time and money to care for and furnish it.

However, overspending for anything, be it housing or shopping, may trickle down and impact other savings goals you have, such as retirement. “The value of the home you’re interested in may be inflated. Could you wait? Could you sell at an elevated price and rent until the markets recalibrate?” Winston says.

The financial tradeoffs of your housing budget

There are plenty of examples of speculative behavior in any economy, particularly when it comes to housing. People make bets on what they think might happen—or, as Winston says, “chasing a unicorn.”

“With housing,” Winston says, “that unicorn is a home with all the bells and whistles, a great interest rate, and under budget.”

But unicorns are hard (if not impossible) to find. A home purchase is usually the single-largest, long-term investment you will make in your lifetime. Delaying a decision with outsize financial impact, even for a few months, may offer benefits.

“Ask yourself, Am I making the right decision for me, for the people around me, for the life I want to live, for how much I can afford, and for what I value?” Winston says. “Those are the things that you already know.”

If you’re looking at houses, decide what tradeoffs will help you stay in budget. Does an up-and-coming neighborhood or more DIY projects gain you square footage and enable you to stay in a home longer?

“Tradeoffs that seem small initially may have a big long-term financial impact,” Winston says.

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