Ask the realtor- Inflation and the housing market: The connection you didn’t know about

Oct 11, 2023 | Ask the Realtor

Have you ever wondered how inflation impacts the housing market? It might surprise you, but these two seemingly separate economic factors are closely connected. Changes in one can have a ripple effect on the other. There’s an intriguing relationship between inflation and the housing market.

To grasp this connection, let’s first define shelter inflation. It’s a measure of price growth specific to housing and is determined through a survey conducted by the Bureau of Labor Statistics (BLS). This survey collects data from both renters and homeowners. Renters are asked how much they pay in rent, while homeowners are questioned about how much they would charge if they were to rent out their homes.

Think of it this way: Just as overall inflation tells us about the rising costs of everyday items, shelter inflation reflects the increasing expenses related to housing. And here’s the interesting part – based on recent surveys, shelter inflation has been on a downward trend for four consecutive months.

Why does this matter? Well, here’s the deal: Shelter inflation accounts for about one-third of the overall inflation calculated by the Consumer Price Index (CPI). When shelter inflation moves, it causes noticeable changes in overall inflation. The recent decline in shelter inflation could be a sign that overall inflation might also decrease in the months ahead.

This potential moderation in inflation would be a welcome sight for the Federal Reserve (the Fed). Since early 2022, they’ve been working hard to get inflation under control. While they’ve made progress (inflation peaked at 8.9 percent last year), they’re still aiming to reach their 2-percent target (the latest report indicates 3.3 percent).

To combat rising inflation, the Fed has been increasing the Federal Funds Rate. This interest rate influences how much it costs banks to borrow money from each other. By raising the rate, the Fed aims to prevent the economy from overheating and causing more inflation.

How does all of this affect the average person?

While the Federal Reserve’s actions don’t directly 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 U.S. dollar. When inflation drops, mortgage rates follow suit.”

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

For prospective homebuyers in this dynamic market, it’s wise to consider interviewing mortgage professionals who do more than simply tout rates. Lenders who not only explain but also have a deep understanding of how money works are likely to provide better service and transparent communication. They can help you find the best mortgage type tailored to your specific needs.

If you’re a seller concerned about how inflation and interest rates might affect your home sale, it’s essential to work with an experienced, local Realtor who comprehends different strategies to attract buyer interest. Knowledgeable real estate agents can not only understand but also articulate options like 2-1 buy-down plans and assumable mortgages, which may work in your favor when selling your home.

As we navigate these economic fluctuations, it’s crucial to stay informed whether you’re a homebuyer, seller, or simply someone interested in the financial landscape. With knowledge and the right guidance, these challenges can be navigated successfully.

If you’d like to learn more about the current local market conditions, explore available options or subscribe to local market statistics that you can follow at your own pace, reach out to Theresa Grant, Real Estate Broker (DRE #01202881) at [email protected]. You can also follow her on Instagram, @theresagrantrealtor, and YouTube, @theresagrantrealtor.


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