How Inflation affects the housing market

Have you ever wondered what impact inflation has on the housing market? They are connected, whether you believe it or not. When one changes, the other is affected. Here’s an overview of the relationship between the two. The Relationship Between Housing and Overall InflationShelter Inflation is the measure of housing price growth. The Bureau of Labor Statistics (BLS) surveyed renters and homeowners to get this information. The survey asks homeowners and renters to estimate how much rent they would pay if they didn’t live in their homes. Shelter inflation has decreased for four consecutive month based on this survey (see graph below). Why is this important? Shelter inflation is about one third of the overall inflation as measured by Consumer Price Index (CPI). When shelter inflation changes, overall inflation also changes. The recent dip in housing inflation might be an indication that overall inflation will fall in the months to come. This would be a welcome sight to the Federal Reserve. Since early 2022, they’ve been trying to control inflation. They’ve made progress (it peaked at 8,9% in the middle last year), but they still have a long way to go to reach their 2% target (the latest report shows 3.3%). What has the Fed done to reduce inflation? They’ve increased the Federal Funds rate. This interest rate affects how much it costs for banks to borrow from each other. The graph below shows how the Fed raised the Federal Funds rate when inflation increased to prevent the economy from overheating. The Fed raises its Federal Funds Rate when inflation starts to rise (blue line). This is to bring inflation back to their 2% target (see below). As inflation approaches the Fed’s 2% target, they may not have to raise the Federal Funds rate as much. The Fed’s actions do not determine mortgage rates but they have an impact. As Mortgage Professional America (MPA) explains:”. . . Mortgage rates and inflation are linked, even if indirectly. Mortgage rates increase when inflation increases to keep up with the US dollar’s value. Mortgage rates drop when inflation falls. “While no one can predict what the future holds for mortgage rates, the signs of a moderating economy are encouraging.” Bottom LineWhether you want to buy, sell or simply stay informed about housing market, contact a local expert.

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