Inflation and the housing market: Decoding the latest numbers

The Consumer Price Index (CPI) eased further in July, according to the latest figures from the U.S. Bureau of Labor Statistics, released August 14. The all-items index increased 2.9 percent over the past year before seasonal adjustment, compared with June’s 12-month jump of 3.0 percent, marking its first dip below 3 percent since 2021.

Inflation is substantially lower now than at its high point of 9.1 percent in the summer of 2022, still short of the Federal Reserve’s stated goal of 2 percent but getting much closer. “Progress has been made on inflation, down significantly from the peak,” says Mark Hamrick, Bankrate’s senior economic analyst. “But it is happening at too slow of a pace to satisfy.”

The Fed has long indicated that rate cuts would be coming at some point this year, but they have arrived not as soon as many had hoped. “The battle against inflation has not yet been won, and the Federal Reserve cannot yet declare ‘mission accomplished,’” Hamrick says. Economists expect a rate cut at the Fed’s next meeting in September, though, which has the potential to shake things up. In the meantime, here’s a peek into how inflation affects the housing market.

The housing market and inflation

While inflation may be headed in the right direction overall, the shelter category, which includes housing costs, has remained stubbornly high. Shelter continues to be one of the biggest contributors to the CPI’s monthly all-items increase, rising 0.4 percent from last month and 5.1 percent year-over-year — it accounts for nearly 90 percent of the all-items index’s July increase.

Nationally, CoreLogic’s most recent home-price analysis reports that home prices rose 4.9 percent from May 2023 to May 2024. It forecasts that price growth will continue through the summer real estate season, increasing 3 percent by May of next year. “Persistently stronger home price gains this spring continue in markets where inventory is well below pre-pandemic levels, such as those in the Northeast. Also, markets that are relatively more affordable, such as those in the Midwest, have seen healthy price growth this spring,” said Selma Hepp, CoreLogic’s chief economist, in a statement. “On the other hand, markets with notable inventory increases, including those in Florida and Texas, continue to see annual deceleration that is pulling prices below numbers recorded last year.”

Meanwhile, Fannie Mae’s latest Home Purchase Sentiment Index (HPSI) decreased slightly in July to 71.5, with 82 percent of respondents saying they believe it’s a bad time to buy a home.

That negative attitude is likely tied to mortgage rates, which have eased since hitting the 8 percent mark in October but remain elevated despite lower inflation. The current average 30-year fixed mortgage rate is 6.59 percent, according to Bankrate’s most recent data.

Lawrence Yun, chief economist of the National Association of Realtors (NAR), foresees things calming down by end-of-year: “Mortgage rates will be bouncy week-to-week but will most likely settle toward 6 percent by the year end,” he said in a recent statement.

“A big wildcard this year involves the questions associated with what happens with mortgage rates and the supply of homes for sale,” says Hamrick. “If we see a continued and more substantial drop in mortgage rates, that could in turn compel more current owners to move, putting their homes on the market. Ultimately, that could ease some of the upward pressure on home prices, which would undo some of the damage inflicted on housing affordability over the past several years.”

What it means for buyers and sellers

Among these decidedly mixed signals, should you buy a home now, or wait? What about selling your home now?

For homebuyers

Low inventory remains a problem for potential buyers across the country. According to the most recent existing home sales data from NAR, the country had a 4.1-month supply of housing inventory in June. That’s an increase from the previous month but still below the 5 to 6 months that would be needed for a balanced market.

It’s OK to wait things out instead of buying now to beat further increases, especially if you’re a first-time homebuyer. While you’d be putting off building equity, you might find you’re in a better position to buy in the future, as the market cools and your income can potentially grow.

“Even when inflation does come down on a consistent basis, it doesn’t mean prices falling; it just means prices not rising as fast,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “For homebuyers, a more modest pace of appreciation, or even a period of stagnant home prices, can allow for incomes to grow further. Rather than stretching too much now, you may be able to buy a bit more comfortably in a couple of years if your income growth outpaces home price growth. But there are no guarantees.”

That said, life circumstances might require you to buy a home now, regardless of market trends, and that’s as good a reason as any. Just make sure you plan to stay in the home for long enough to come out ahead when you eventually sell.

For home sellers

The ongoing housing shortage may provide an opportunity for sellers to get a better price for their homes. This is good news, but keep in mind that if you then need to buy a new home, the tables will turn, and you’ll be subject to the same circumstances — and high mortgage rates — as other buyers.

And remember, location matters. The nationwide median home-sale price was a record-high $426,900 in June, according to NAR, but prices vary greatly from one area to the next. So, depending on where you live, you could find fewer takers or need to come down on price.

Homebuying tips when prices are high

If you’re set on buying soon, here are a few ways you can stretch your housing budget:

• Put your down payment savings in a high-yield account: One upside to inflation and the Fed’s many price hikes: higher interest rates on savings accounts. If you aren’t already, put the money you’re saving toward a down payment into a high-yield account. Just make sure the account allows you to access your money easily when it comes time for closing — some online savings accounts take three days to deliver your funds when you withdraw.
• Consider a mortgage lender with low or no fees: While it might be more convenient to get a mortgage at your bank, banks typically charge an origination fee, often 1 percent of the amount you borrow. Many non-bank and online lenders don’t, so if you can find a no-fee lender with attractive rates, you’ll keep more money in your pocket.
• Lock in your mortgage rate: When you find a lender and apply for a loan, ask about locking in your rate. Now’s not the time to take a chance on your monthly mortgage payment suddenly soaring in price, right before you’re set to close.