Leave a Message

Thank you for your message. We will be in touch with you shortly.

How Inflation Affects the Housing Market

Oriana Suarez September 12, 2023

Tips

How Inflation Affects the Housing Market

How Inflation Affects the Housing Market

Have you ever wondered how inflation impacts the housing market? Believe it or not, they’re connected. Whenever there are changes to one, both are affected. Here’s a high-level overview of the connection between the two.

The Relationship Between Housing Inflation and Overall Inflation

The indicator of price growth specifically for housing is called shelter inflation. It originates from a Bureau of Labor Statistics (BLS) poll of homeowners and renters. Renters are asked how much they pay in rent, and homeowners are asked how much they would charge for their homes if they weren't residing in them.

Shelter inflation tracks the cost of housing in a manner similar to how overall inflation tracks the cost of basic necessities. Based on that study, the cost of housing has decreased for four straight months (see graph below):

Why is this important? Inflation in housing accounts for almost one-third of overall inflation, according to the Consumer Price Index (CPI). Therefore, changes in shelter inflation result in changes that are seen in total inflation. That is why the recent decline in shelter inflation may be a precursor to a future decline in total inflation.

The Federal Reserve (the Fed) would be happy to see such moderation. Since the beginning of 2022, they have been attempting to curb inflation. Despite considerable progress (it reached a height of 8.9% in the middle of last year), they are still working to reach their 2% target (the most recent figure is 3.3%). 

Inflation and the Federal Funds Rate  

To combat rising inflation, the Federal Reserve has implemented a strategy of increasing the Federal Funds Rate. This key interest rate directly impacts the cost of borrowing money from banks from one another. When inflation begins to rise, the Fed's response is to raise the Federal Funds Rate as a measure to prevent the economy from overheating.

The relationship between the two is depicted in the graph below. The Federal Reserve raises the Federal Funds Rate (shown in the orange line) every time inflation (shown in the blue line) begins to increase in an effort to bring it back to its objective of 2% (see below):

The circled portion of the graph shows the most recent spike in inflation, the Fed’s actions to raise the Federal Funds Rate to fight that, and the moderation of inflation that happened in response to that hike. As inflation gets closer to the Fed’s current 2% goal, they may not need to raise the Federal Funds Rate much further.

Implications for Mortgage Rates

So, what does all of this mean for you? While the actions coming out of the Fed don’t determine mortgage rates, they do have an impact. As Mortgage Professional America (MPA) explains:

“. . . mortgage rates and inflation are connected, however indirectly. When inflation rises, mortgage rates rise to keep up with the value of the US dollar. When inflation drops, mortgage rates follow suit.”

While no one can predict the future of mortgage rates, it’s encouraging to see the signs of moderating inflation in the economy.

Bottom Line

Whether you’re looking to buy, sell, or just stay informed about the housing market, connect with one of our local real estate experts who can help. Your real estate dreams are our top priority, and our realtors are here to turn them into reality. Don't hesitate – get in touch with us today and let's start the conversation that leads to your next success story in the world of real estate.

 

Recent Blog Posts

Stay up to date on the latest real estate trends.

Florostone Realty graphic listing 5 key tips for selling a home in Union County, NJ, including pricing strategies, curb appeal, professional photography, optimal listing timing, and partnering with a local expert.

Tips

Selling a Home in Union County, NJ? 5 Key Tips for a Successful Sale

May 7, 2025

Expert Tips to Sell Fast and Maximize Value in 2025

Tips

How to Generate a Steady Stream of Buyer and Seller Leads Without Cold Calling

March 29, 2025

From SEO and social media to email marketing and referrals, this blog breaks down the best strategies to attract and convert leads without picking up the phone.

Sellers

Should You Get a Pre-Listing Inspection Before Selling Your New Jersey Home?

March 15, 2025

Learn why a pre-listing inspection may be the smartest move before putting your house on the market!

Buyers

Breaking Into the New Jersey Market: Smart Moves for First-Time Buyers

March 1, 2025

Learn how to navigate high prices, expand your search area, and leverage local knowledge to find the perfect first home.

Tips

How New Agents Can Attract Clients and Build a Thriving Business

February 24, 2025

Starting out in real estate can be overwhelming, but with the right strategies, new agents can quickly grow their client base.

Sellers

If Your House’s Price Isn’t Compelling, It’s Not Selling

February 15, 2025

Overpricing can lead to fewer showings, longer days on the market, and buyers questioning what’s wrong with the property.

Buyers

3 Reasons To Buy a Home Before Spring

February 1, 2025

Buying a home before spring offers distinct advantages, including less competition from other buyers, increased negotiating power, and the chance to lock in lower home… Read more

Sellers

How Eco-Friendly Features Can Boost Your Home’s Value

January 15, 2025

From energy-efficient appliances and insulation to solar panels and landscaping, these upgrades can enhance your home's appeal, reduce energy costs, and boost its valu… Read more

Tips

5 Essential Habits for New Realtors to Build a Thriving Career

January 15, 2025

Starting in real estate can feel overwhelming, but building the right habits early on can set the foundation for long-term success.

LET’S CONNECT

We strive to become your go-to Real Estate Advisors. Book a free consultation today and let’s get started with a buying or selling plan for your home customized to your unique timeline.