How Inflation Affects Housing


The Federal Reserve has indicated that the central bank views inflation as a national emergency, with markets expecting a 0.75 percent interest rate rise.

However, the Fed’s policy measures could come at a high cost, notably in the housing market. 

Low mortgage rates and a lack of housing inventory during COVID-19 lockdowns sent home prices skyrocketing during the last two years. The housing market is cooling as mortgage rates have gone up and even surpassed 6 percent.

Although this may be an acceptable short-term price to pay in the fight against inflation, it will cause future supply-chain issues after inflation is under control. 

Before the pandemic, a six-month supply of homes for sale was considered a sign of a healthy, balanced housing market. There were only 1.1 million homes for sale at the end of May, representing a 2.6-month supply at the current pace of sales. That supply-demand imbalance helped push the national median home price to more than $400,000 in May—the highest on record, according to the National Association of Realtors.  

According to the NAR, the median existing-home sales price was $407,600 in May, up 14.8 percent from the previous year. On the other hand, existing house sales fell by 3.4 percent for the month, indicating a slowing in demand.

The number of mortgage applications is down by more than half year on year. With further rate rises on the horizon, it’s not unrealistic to anticipate more declines in house demand. This will help to rebalance the already stressed housing market, but not to the point of a crash. 

However, if the US economy enters a recession, the stage may be set for a drop in property values. A broader economic downturn would undoubtedly cause more homeowners to sell their homes than would otherwise be the case. This boost in supply may cause housing prices to level off slightly. 

Higher mortgage rates will lead to lower housing prices in “juiced” markets such as Phoenix and Tucson in Arizona, the Carolinas, northeast Florida, and Boise, Idaho.

But they won’t end up crashing prices overall, predicted Mark Zandi, Chief Economist at Moody’s.

“That’s when you get crashes when you have lots of foreclosures and a lot of distressed sales,” Zandi said. “That’s just not going to happen.” 

A decline in house prices will be consistent with the Fed’s price-cutting agenda. Fed Chair Jerome Powell noted the fast changes in the housing market shortly after the Fed raised its key interest rate by three-quarters of a percentage point for the first time since 1994.

“I’d say if you are a homebuyer, somebody or a young person looking to buy a home, you need a bit of a reset,” Powell said. “We need to get back to a place where supply and demand are back together and where inflation is down again, and mortgage rates are low again.” 

Jacob Chanel, Senior Economist at Lending Tree, believes high-interest rates have already caused a housing market cooldown. 

“Fewer people are getting mortgages, homes are sitting on the market for longer, and some sellers are cutting prices,” Channel said.

Increasing interest rates have yet to have a significant influence on pricing.

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