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.
Shelter inflation is the measure of price growth specific to housing. 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):
Why does this matter? Well, shelter inflation makes up about one-third of overall inflation, as measured by the Consumer Price Index (CPI). So, when shelter inflation moves, it leads to noticeable moves in overall inflation. That means the recent dip in shelter inflation might be a sign that overall inflation could fall in the months ahead.
That moderation would be a welcome sight for the Federal Reserve (the Fed). They’ve been working to get inflation under control since early 2022. While they’ve made some headway (it peaked at 8.9% in the middle of last year), they’re still trying to get to their 2% goal (the latest report is 3.3%).
What’s the Fed been doing to lower inflation? They’ve been increasing the Federal Funds Rate. That interest rate influences how much it costs banks to borrow money from each other. When inflation climbed, the Fed responded by raising the Federal Funds Rate to keep 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 (shown in the orange 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.
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 for 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, let’s connect.
Even though you may feel reluctant to sell your house because you don’t want to take on a mortgage rate that’s higher than the one you have now, there’s more to consider. While the financial side of things does matter, your personal needs may actually matter just as much. As an article from Bankrate says:
“Deciding whether it’s the right time to sell your home is a very personal decision. There are numerous important questions to consider, both financial and lifestyle-based, before putting your home on the market.”
So, ask yourself this: why did I want to move in the first place?
Chances are your primary motivation wasn’t just financial in nature. Why you’re really thinking about selling likely has more to do with something changing in your life or a shift in what you need out of your house.
Let’s explore some of the most common reasons sellers are moving today. A recent article from Builder Online helps shed light on this. In this research, they identified the following categories:
You may find you share one of these top motivators. If any of these resonate with you, it may be time to move so you can find a house better suited to your changing needs. A survey from Realtor.com finds other sellers are in the same boat. It says, 1 in 4 sellers are choosing to move for personal reasons, even with current mortgage rates:
“. . . more than half of seller-buyers (56%) who are planning to sell in the next 12 months said they are waiting for rates to come down, while 25% need to sell soon for personal reasons.”
If you need to sell now because something in your own life has changed, don’t let rates hold you back from what you want. You have options to help make that move possible. You can use the equity you already have in your current home toward your next purchase. And with how much equity homeowners have right now, you may be able to finance less than you’d expect, or pay all cash to avoid borrowing at all.
When you're ready to prioritize your changing needs, let’s connect. You need an expert on your side to help you list your house and find a home that delivers on everything you're looking for.
The housing market continues to shift and change, and in a fast-moving landscape like we’re in right now, it’s more important than ever to have a trusted real estate agent on your side. Whether you’re buying your first home or selling once again, it’s mission critical to work with an expert who can guide you through each unique step of the process.
The reality is, not all agents operate the same way. To truly make a powerful and confident decision as you buy or sell a home, you need a real estate expert who uses their knowledge of what’s really happening with home prices, housing supply, industry projections, and more to give you the best possible advice. Someone who can provide clarity and trust like that is essential to your success. Jay Thompson, Real Estate Industry Consultant, explains:
“Housing market headlines are everywhere. Many are quite sensational, ending with exclamation points or predicting impending doom for the industry. Clickbait, the sensationalizing of headlines and content, has been an issue since the dawn of the internet, and housing news is not immune to it.”
Unfortunately, when information in the media isn’t clear, it can generate a lot of fear and uncertainty for consumers. As Jason Lewris, Co-Founder and Chief Data Officer at Parcl, says:
“In the absence of trustworthy, up-to-date information, real estate decisions are increasingly being driven by fear, uncertainty, and doubt.”
But it doesn’t have to be that way. Buying a home is a big decision, and it should be one you feel confident making. You can lean on an expert to help you separate fact from fiction and get the answers you need.
The right agent can assist you in figuring out what’s going on at the national level and in your local area. They can debunk headlines using data you can trust. Experts have in-depth knowledge of the industry and can provide context, so you know how current trends compare to the normal ebbs and flows in the housing market, historical data, and more.
Then, to make sure you have the full picture, an agent can tell you if your local area is following the national trend or if they’re seeing something different in your market. Together, you can use all that information to make the best possible decision.
After all, making a move is a potentially life-changing milestone. It should be something you feel ready for and excited about. And that’s where a trusted expert comes in.
If you want sound advice and trusted information about our local housing market, let’s connect.
The National Association of Realtors (NAR) is set to release its most recent Existing Home Sales (EHS) report tomorrow. This monthly release provides information on the volume of sales and price trends for homes that have previously been owned. In the upcoming release, it’ll likely say home prices are down. This may seem a bit confusing, especially if you’ve been following along and reading the blogs saying home prices have hit the bottom and have since rebounded.
So, why would this say home prices are falling when so many other price reports say they’re going back up? It all depends on the methodology of each one. NAR reports on the median home sales price, while some other sources use repeat sales prices. Here’s how those approaches differ.
The Center for Real Estate Studies at Wichita State University explains median sales prices like this:
“The median sale price measures the ‘middle’ price of homes that sold, meaning that half of the homes sold for a higher price and half sold for less . . . For example, if more lower-priced homes have sold recently, the median sale price would decline (because the “middle” home is now a lower-priced home), even if the value of each individual home is rising.”
Investopedia helps define what a repeat sales approach means:
“Repeat-sales methods calculate changes in home prices based on sales of the same property, thereby avoiding the problem of trying to account for price differences in homes with varying characteristics.”
As the quotes above say, the approaches can tell different stories. That’s why median home sales price data (like EHS) may say prices are down, even though the vast majority of the repeat sales reports show prices are appreciating again.
Bill McBride, Author of the Calculated Risk blog, sums the difference up like this:
“Median prices are distorted by the mix and repeat sales indexes like Case-Shiller and FHFA are probably better for measuring prices.”
To drive this point home, here’s a simple explanation of median value (see visual below). Let’s say you have three coins in your pocket, and you decide to line them up according to their value from low to high. If you have one nickel and two dimes, the median value (the middle one) is 10 cents. If you have two nickels and one dime, the median value is now five cents.
In both cases, a nickel is still worth five cents and a dime is still worth 10 cents. The value of each coin didn’t change.
That’s why using the median home sales price as a gauge of what’s happening with home values may be confusing right now. Most buyers look at home prices as a starting point to determine if they match their budgets. But most people buy homes based on the monthly mortgage payment they can afford, not just the price of the house. When mortgage rates are higher, you may have to buy a less expensive home to keep your monthly housing expense affordable.
That’s why a greater number of ‘less-expensive’ houses are selling right now – and that’s causing the median home sales price to decline. But that doesn’t mean any single house lost value.
When you see the stories in the media that prices are falling later this week, remember the coins. Just because the median home sales price changes, it doesn’t mean home prices are falling. What it means is the mix of homes being sold is being impacted by affordability and current mortgage rates.
For a more in-depth understanding of home price trends and reports, let’s connect.