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How Inflation Affects the Housing Market


Have you ever thought about how inflation can have an impact on the housing market? It might surprise you, but they’re actually interconnected. Whenever there are changes in one, it affects the other as well. Let’s take a friendly dive into how these two are linked.

The Relationship Between Housing Inflation and Overall Inflation

Have you ever pondered the connection between inflation and the housing market? It might come as a surprise, but they are indeed closely intertwined. When one experiences changes, it inevitably influences the other. Let’s explore how these two realms are interconnected .Many individuals and families. It comes from a survey of renters and homeowners that’s done by the Bureau of Labor Statistics (BLS). The survey asks renters how much they’re paying in rent, and homeowners how much they’d rent their homes for, if they weren’t living in them.

Much like overall inflation measures the cost of everyday items, shelter inflation measures the cost of housing. And for four consecutive months, based on that survey, shelter inflation has been coming down (see graph below):

Now, why is this significant? Well, shelter inflation constitutes roughly one-third of the total inflation gauge, as assessed by the Consumer Price Index (CPI). Therefore, when shelter inflation experiences fluctuations, it tends to have a discernible impact on the overall inflation rate. This suggests that the recent decrease in shelter inflation might indicate a potential decline in overall inflation in the upcoming months.

. This moderation would certainly be a positive development for the Federal Reserve (the Fed). They’ve been diligently striving to rein in inflation since the beginning of 2022. Although they have made progress (it reached a peak of 8.9% in the middle of last year), they are still working towards achieving their 2% target (the latest report indicates 3.3%).

Inflation and the Federal Funds Rate  

.What steps has the Fed taken to combat inflation? Well, they’ve been raising the Federal Funds Rate. This particular interest rate plays a role in determining the cost at which banks can borrow money from one another. In response to the rising inflation, the Fed has taken action by increasing the Federal Funds Rate, aiming to prevent the economy from overheating.

The graph below shows the relationship between the two. Each time inflation (shown in the blue line) starts to climb, the Fed raises the Federal Funds Rate line) to try to get it back to their target 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.

A Brighter Future for Mortgage Rates?

So, how does all of this affect you? While the Federal Reserve’s actions don’t directly dictate mortgage rates, they do exert an influence. As mentioned by Mortgage Professional America (MPA),

“. . . 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 for 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, I am here to help. “Let’s Connect and Get You Moving”

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