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Housing Market Inflation: What You Need To Know

April 03, 2024 8-minute read

Author: Kevin Graham


Updated: January 2024

Inflation is a hot button topic across the economy, but there’s no doubt the effect is more visible in some areas than others. Home prices are certainly a high-profile example. Knowing more about housing market inflation will help you figure out the best ways of dealing with it. So will a few tips.

What Is Inflation And How Does It Affect The Housing Market?

When we speak of inflation in an economic sense, we’re referring to rising prices relative to the value of the dollar. When inflation rises, costs are higher for the same amount of goods and services than they were previously. The housing market is no different. In general, if prices are rising across the economy, prices for housing will also rise.

However, there is a good argument to be made that the housing market is at the forefront of national inflation. After all, housing is a big portion of Americans’ monthly expenses. At the same time, there are some indications that it’s not as severe a problem as it used to be.

Below, you’ll find a historical graph of the price index included with the Personal Consumption Expenditures (PCE) report put out by the Bureau of Economic Analysis. This is the Federal Reserve’s preferred metric for inflation when it looks to set the target range for the federal funds rate, which serves as the basis for interest rates across the financial markets.

The Fed typically excludes food and energy because these prices are notoriously volatile. When this core number is looked at, it was 3.7% on a quarterly basis.

The rate of inflation over time as measured by the change from the same quarter of the prior year

The Current State Of The Housing Market And Inflation

One major indicator of inflation within the economy is the consumer price index (CPI). Although it’s not the Fed’s preferred metric, this breaks out shelter and a couple of components of housing cost in a way that PCE doesn’t.

In the latest reported data, the CPI has risen 3.1% compared to the same time a year ago according to November 2023 data from the Bureau of Labor Statistics.

On an unadjusted basis, the cost of shelter in this data is up 6.5% since the previous November. This includes a 6.9% increase in the cost of renting a primary residence to go along with an increase in the amount it would cost for a homeowner to rent an equivalent space of 6.7% over the same period.

It’s worth noting that the numbers vary depending on where you look. One of the major indexes tracking home prices is the Case-Shiller Home Price Index. This is a rolling 3-month average of home prices in major American cities. On an unadjusted basis, home values have risen 4.87% as of October 2023.

Is Real Estate Good To Own During A Housing Inflation Storm?

It’s generally good to own real estate in an inflationary environment for a few reasons. Home prices increase just as much if not more than prices increase across the economy during inflation.

That means after accounting for the down payment and any payments you’ve already made, you’re likely also gaining equity in your home faster based on value increases. Not only does this mean you make more if you sell, but you would also have more financial flexibility to accomplish your goals in a cash-out refinance.

Rising interest rates during times of inflation are a legitimate concern, but if you have a locked-in interest rate, you can protect yourself from further future increases, particularly if you go with a fixed-rate mortgage.

In addition, rental property owners have an easier time raising rent during times of inflation. If rents are going up everywhere, it’s easier to justify an increase of your own the next time you renew with your tenants.

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What Happens To The Housing Market When Inflation Ends?

Inflation has already begun to slow dramatically. Prices can’t rise at a breakneck pace forever without harming the value of the dollar. The Federal Reserve has already taken actions – like raising interest rates – to tame inflation.

However, in most markets, rising rates alone haven’t meant a decrease in home prices. This is because there aren’t enough homes on the market relative to demand. Most homes sold in this country are pre-existing homes. Yet the supply on in the market is only 3.6 months based on the current pace of sales. The market is typically considered in balance with 6 months of supply.

Part of the reasoning for this is that some sellers are no doubt unwilling to trade a very low mortgage rate for a much higher one when they find their next home. However, that doesn’t mean there aren’t some positives.

Although home prices aren’t necessarily falling, there are likely to be fewer multiple offer situations, reducing the likelihood that you’ll find yourself in a bidding war. There are fewer people looking now that rates are higher. At the same time, mortgage rates have started to come down in recent weeks, and indications from the Fed are that relief may be on the way.

Tips For Buying A House When Prices Are High

While prices are high in many areas of the country, that doesn’t mean you have to throw up your hands in defeat. There are things you can do to put yourself in position to buy a house more affordably.

Lock In Your Mortgage Rate As Soon As Possible

When inflation is high, the way that officials try to swing the pendulum back is to raise interest rates. The reasoning here is that if money gets more expensive to borrow, people will spend less, which brings prices down over time. Inflation comes back in line.

Of course, the flip side to this is that, if you’re looking to buy a home, mortgage rates go up at the same time you hope home prices come down. This is why you should consider locking in your interest rate early in the home buying process.

Shop Around For A Lender With The Most Favorable Terms

It’s no mystery that lenders charge different interest rates. It’s important to not just look at the base rate, but also the one that includes all the settlement costs. There are fees for things like appraisal, title insurance and origination fees, just to name a few, that are associated with closing a loan.

When you apply for any loan, including a mortgage, there are two rates: the base rate that your monthly payment is based on and the one that includes all the other fees associated with originating the loan. It’s important to look at this annual percentage rate (APR) because it represents the total cost of the loan.

You should shop around for the best terms but be sure to look at the APR when making decisions. It’s also important to note that the bigger the difference between the base interest rate and the APR, the higher the fees for the loan.

Open A High Yield Account

When is the last time you considered shopping around for a better bank?

When interest rates go up, some banks will be slower to raise interest rates while others will compete for your business by offering slightly higher rates on savings accounts, helping your money grow. High yield savings accounts offer even higher rates. Recently, rates of more than 4% and higher have been more common. You might have to do some research on ATM networks if you need physical cash, but it could be worth moving some of your money.

These dollars add up quite a bit when you’re saving for a down payment and the closing costs necessary to buy a home.

FAQs On Housing Market Inflation

Now that we’ve touched on the broad outlines of inflation and how it impacts the housing market, let’s answer a few more questions.

What does inflation do to home prices?

The effects of inflation are likely to be felt in home prices just as they would be anywhere else in the economy. However, it wouldn’t be wrong to say you can feel it more in housing because it’s a bigger part of your budget. An 8% increase in the price of milk hurts the pocketbook, but it is different when it’s 8% on a home.

Is it good to buy a house during inflation?

If you can afford it, it could make sense to buy a house during inflation for a couple of reasons: First, prices rarely go down even after inflation slows. They just stop going as high as quickly. Second, landlords also charge higher rent to keep up with inflation, but that can change every year. If you get a fixed-rate mortgage, your principal and interest payment stays the same.

Is it better to buy a house during inflation or recession?

Assuming you can afford the house and haven’t been too negatively impacted by either, it probably doesn’t matter. Why? For most people, a house is a long-term investment. You’re likely not going to sell the home for at least a few years, and who knows what the market will be like then?

If you’re a house flipper, you might try to buy just at the start of an inflationary period and sell just when prices are peaking. On the other hand, you may find a really good deal on a home if someone has to move during a recession when other people might be more hesitant to buy. However, in either case, it can be very hard to time the market.

How does supply and demand affect housing market inflation?

Right now, with undersupply, sellers may wish to put their home on the market figuring it’s an advantageous time given rising prices. If enough people put their homes on the market and prices keep rising, buyers could drop out, causing an oversupply in the market. It’s an endless cycle.

The Bottom Line

Inflation impacts the housing market, and it may or may not be at a higher rate than the broader economy. On one hand, if prices go up on housing at all, you’re likely to quickly notice, because the base cost of the house is higher than any other good or service. At the same time, because it’s such a big portion of the budget, it also has the potential to make inflation higher.

In general, it’s not a bad idea to own the house during the time of inflation because the price of the home will go up like everything else. And when inflation ends, the price is unlikely to drop dramatically. It just won’t go up as fast.

To prepare for an inflationary housing market, lock in your mortgage rate as soon as possible while also shopping for the best terms so that you can get the most affordable financing. You can also help your money grow by putting it into a higher yield savings account. If you’re ready to jump on an opportunity, start your initial mortgage approval today!


Kevin Graham

Kevin Graham is a Senior Blog Writer for Rocket Companies. He specializes in economics, mortgage qualification and personal finance topics. As someone with cerebral palsy spastic quadriplegia that requires the use of a wheelchair, he also takes on articles around modifying your home for physical challenges and smart home tech. Kevin has a BA in Journalism from Oakland University. Prior to joining Rocket Mortgage, he freelanced for various newspapers in the Metro Detroit area.