How Inflation Affects the Housing Market

Estimated reading time: 2 minutes

When people think about inflation, some may think of rising grocery prices or other consumer goods. Consumers may also know that inflation influences the housing market, but how?

What is Inflation?

Inflation is the rate at which general prices of goods and services rise over time. It’s often measured by the Consumer Price Index (CPI) or the Producer Price Index (PPI). Whereas CPI is a measurement of the value of goods and services for consumers, PPI measures the cost of goods from a producer’s perspective. Both measurements reflect changes in the cost of living.

What Causes Inflation?

Inflation is caused by a combination of factors, including higher production costs, changes to government monetary policy, such as an increased money supply, and increased demand for products. When demand outpaces supply, prices tend to rise and lead to inflation.

As inflation rises, you’ll need more money to buy the same goods and services as before. To counteract this, central banks, such as the Federal Reserve, may raise interest rates to make borrowing more expensive. This reduces the demand and alleviates upward pressure on prices.

How Does Inflation Influence the Housing Market?

In recent years, housing price increases have historically outpaced inflation. The Federal Reserve raised interest rates to help slow down the economy.

In October, Bankrate suggested that inflation was moderating based on the CPI data. The Census Bureau data suggests that inventory is correcting itself as well. On October 24, they reported that inventory was 470,000 units, or 7.6 months’ supply. According to the National Association of Realtors, a “healthy” months’ supply is 5-6 months.

In response to slowing inflation and cooling job data, the Federal Reserve cut rates by half a percentage point in September—their first rate cut in 18 months.

How Can You Buy a Home When Inflation is High?

Inflation and the policy changes that seek to correct it have a compounding effect on housing affordability, but there are steps you can take to ensure the housing market works in your favor.

Utilize a Pre-Approval Over a Pre-Qualification

With a pre-approval letter in hand, you can have a much stronger offer over being pre-qualified. It’s written proof, in the form of a loan commitment letter, from a mortgage lender that you have the means to qualify and pay for the mortgage you applied for based on a thorough financial review. The odds of a home sale falling through are far lower than a purchase made without one.

Decide What Rate Type and Term are Best for You

Not all mortgage rates are created equal. While people may be familiar with 30-year fixed interest rates, your financial goals may align better with an adjustable rate or a different loan term.

Work With an Experienced Homebuying Team

Your real estate agent can be your personal guide through your homebuying journey. Not only can they tailor their search to focus on what you need, but you may also find your dream home before it’s even listed on public sites. Real estate agents have vast networks of agents and other professionals that you can leverage.

When it’s time for home financing, McGlone Mortgage is by your side every step of the way! When you contact us, you’ll be put in contact with a Licensed Loan Originator that will demystify the process from application to closing.