Oriana Suarez September 12, 2023
Tips
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 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%).
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.
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.
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.
Stay up to date on the latest real estate trends.
October 1, 2024
Nearly 80% of first-time homebuyers qualify for down payment assistance, but only 13% actually utilize it. Don’t miss out! Learn about down payment options, grants, an… Read more
September 29, 2024
With nearly half of all homebuyers starting their search online, your listings need to stand out. Learn how to enhance your online presence with professional photos, v… Read more
September 16, 2024
Worried about selling your home during an election year? Historical data shows that Presidential elections have a minimal, temporary impact on the housing market. Disc… Read more
September 1, 2024
This blog offers practical advice on how to find a great local agent, including tips on checking their reputation, ensuring they have local market expertise, evaluatin… Read more
August 30, 2024
As the real estate landscape undergoes significant changes in 2024, it's crucial for professionals to stay informed and prepared.
August 16, 2024
Key considerations include the suitability of your property for rental, your readiness to manage tenants, and the costs associated with being a landlord. Explore these… Read more
August 2, 2024
In today's housing market, newly built homes may offer more budget-friendly options than many buyers expect. Contrary to common belief, the median sales price for newl… Read more
July 26, 2024
Starting August 17, 2024, MLS Participants must have a written agreement with buyers before home tours. This guide covers mandatory provisions and additional considera… Read more
July 15, 2024
Over the past year, homeowners have seen significant equity gains due to rising home prices. According to CoreLogic, the average homeowner's equity has increased by $2… Read more
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.