Does Inflation Affect the Housing Market?

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Housing Market

Inflation has become the buzzword of recent economic discussions, and its impact on various sectors, including the housing market. As prices for everyday goods and services continue to rise, the housing market has not been immune to this phenomenon. In this blog, we’ll explore how inflation is affecting the housing market and what potential homebuyers and sellers can do to navigate through the waters.


Inflation and the Economy

Inflation refers to the steady increase in the general price level of goods and services in an economy over time. When inflation is moderate, it can indicate a healthy, growing economy. However, hiked rates can create uncertainty and challenges for various markets, including housing.


Shelter Inflation

The measure of price growth specific to housing is known as shelter inflation. It is from a survey the Bureau of Labor Statistics (BLS) conducts of renters and homeowners. The BLS survey asks renters how much they are paying for their rent, and homeowners how much they would rent their homes for, if not living in them.

Shelter inflation measures the cost of housing, much like overall inflation measures the cost of everyday items. The graph below shows it has been coming down in the past few months.

Shelter Inflation

Shelter inflation is one-third of overall inflation, as measured by the Consumer Price Index (CPI). When it goes up or down, there are noticeable moves in the overall inflation. So, the recent dip might be a sign that overall inflation could be lower in the coming months.

The Federal Reserve welcomes the dip. They have been working to get inflation under control since 2022. While they have made some progress, they’re still trying to get to their 2% goal.


Inflation and the Federal Funds Rate

What has the government 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 increases, the government responds by raising the Federal Funds Rate to keep the economy from overheating.

The graph below shows the relationship between inflation and the Federal Funds Rate. Each time inflation (blue line) starts to climb, the government raises the Federal Funds Rate (orange line) to get it back to the target of 2%.

Federal Reserve Rate

The circled area of the graph shows the most recent spike in inflation, the government’s actions to raise the Federal Funds Rate, and the inflation that happened in response to that hike. As inflation gets closer to the government’s current 2% goal, they may not need to raise the Federal Funds Rate much further.


What Does This Mean for Mortgage Rates?

The government’s actions don’t determine mortgage rates, but they do have an impact. Mortgage Professional America (MPA) stated, “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 is encouraging to see the signs of inflation dropping in the economy.


What Does This Mean for You?

Whether you’re looking to buy, sell, or just stay informed about the housing market, contact a real estate broker at Wenzel Select Properties today! Our team of professionals will help find the exact fit for your individual or family lifestyle, whether it is selling, purchasing, or renting a new home. 

Wenzel Select Properties is located at 4941 Main Street in Downers Grove, Illinois. Our real estate office is in the heart of downtown Downers Grove. We are just minutes away from Interstates 88, 355, 55, 290, and 294. Wenzel Select Properties real estate brokers are available to meet with you 7 days a week – Monday through Sunday. You can call us for an appointment at (630) 430-4790.