How The Housing Market Is Affected By Inflation


Inflation has affected the housing market as higher costs of living puts more stress on the average person’s finances.

The average American household spent $709 more in July than they did two years ago to buy the same goods and services, according to Moody’s Analytics.

“High inflation of the past 2+ years has done lots of economic damage,” Mark Zandi, chief economist at Moody’s Analytics, wrote in a post on X, the platform formerly known as Twitter.

Rick Sharga, President & CEO of CJ Patrick Company, said among other things, inflation makes it harder for renters to save money for a down payment, and as home prices tend to go up over time, the amount of money needed for a down payment gets higher the longer it takes a prospective buyer to save.

Inflation also means that everyday expenses take a bigger bite out of monthly household income, making it harder for prospective buyers to qualify for a loan in the first place.

“Lenders look at a variety of financial criteria before approving a loan, including cash reserves, down payment amount, and a borrower’s debt-to-income ratio, all of which are negatively impacted by high inflation,” said Sharga.

As inflation has prompted the Federal Reserve to raise the Fed Funds Rate, mortgage rates have more than doubled, meaning that for most borrowers, monthly mortgage payments have jumped between 45-60% from where they were a year ago, crushing affordability.

At the same time, higher mortgage rates have “locked in” millions of homeowners who simply can’t afford to sell their house and give up their 3.5% mortgage in order to buy a more expensive home with a 7% loan. This has led to a shortage of homes available for sale, causing home prices to go up even further, exacerbating the affordability challenge many buyers face.

“And higher Fed Funds Rates translate to higher interest rates on credit cards, sapping even more money from households – especially those that have tapped into credit cards to make ends meet during this period of high inflation,” said Sharga. “Consumer credit card use exceeded $1 trillion last quarter for the first time in history.”

Sharga wondered: What impact is housing having on inflation?

Although Moody’s didn’t share any details, they noted that most of the increased household spending they referred to in their report was attributable to housing costs.

This makes a lot of sense, Sharga said, since home prices have increased dramatically over the past few years and peaked last June (and were only 0.9% down from a peak this year in June) and combined with escalating mortgage rates are probably one of the biggest contributors to inflation today.

Rental prices also soared in 2021 and 2022 (asking rental prices were up 15% year-over-year) before settling down to more normal yearly increases this year. In fact, Sharga added that even as the overall rate of inflation has come down from over 9% to right around 3%, housing costs have not, and the supply shortage of owner-occupied homes has caused home prices to go up 1.9% from 2022 numbers in July.

So, while inflation has definitely taken a toll on the housing market, the housing market itself has been – and continues to be – a pretty significant contributor to the rate of inflation, and to the escalating costs of living that Moody’s cited.

Sharga said he’s not sure if this is a “Catch-22” or “chicken and egg” scenario, but housing is certainly right in the middle of the Fed’s battle to get inflation firmly under control.

ATTOM CEO Rob Barber, agrees that like everything else connected to spending, inflation does affect the housing market – often in multiple negative ways.

Those include higher mortgage rates, property taxes, and even homeowner insurance.

“The biggest impact usually comes with mortgage rates. They have more than doubled over the past two years as interest rates in general have gone up amid the Federal Reserve’s attempts to tame inflation,” said Barber.

Benchmark Fed rates have gone up numerous times since 2021, which makes home-buying more expensive. Barber said they are likely to stabilize now that inflation has dropped so much over the past year.

“Beyond that there are less-direct effects like increased property taxes, which rise as local governments see inflation push up the cost of services that they have to pass along to homeowners,” he added.

“The same thing can happen with homeowner insurance as insurance companies raise rates to keep up with inflation. All those factors make homebuying more expensive, and that reduces buyer demand and dampens home prices,” concluded Barber.

Jessica Lautz, deputy chief economist and vice president of research at with National Association of Realtors, said the Fed is keeping a close eye on inflation.

Unfortunately, the rate hikes of the Fed Fund rate haven’t stopped and may continue this fall.

“That is having a domino effect into the mortgage market. Inflation has eased and is nearly at the Fed’s target rate,” she said. “The expectation is that mortgage interest rates will decline by year-end and into 2024 in the 6% range, but for now, home buyers are encountering rates that are the highest in two decades.”

Lautz also noted that inflation is hitting potential homebuyers as they save for a down payment.

“While a potential buyer may be interested in saving and doing so diligently, the increased cost of rent and goods will impact the amount they can put away at the end of the month,” added Lautz.

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