Inflation And The Housing Market –

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The December 2023 Consumer Price Index (CPI) rose slightly from the previous month, according to the latest figures from the U.S. Bureau of Labor Statistics, released January 11. The all-items index increased 3.4 percent over the past year before seasonal adjustment, a bit elevated from November’s 12-month jump of 3.1 percent.

Despite the modest increase, inflation is now down substantially from its peak of 9.1 percent last summer, and before July 2023 it had declined for 12 straight months. “Progress has been made on inflation, down significantly from the peak,” says Mark Hamrick, Bankrate’s senior economic analyst. “But the Federal Reserve is not yet ready to declare ‘mission accomplished,’ and consumers are still facing a significant erosion of their buying power.”

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Progress has been made on inflation, but the Federal Reserve is not yet ready to declare ‘mission accomplished.’
— Mark Hamrick, Bankrate Senior Economic Analyst

The Fed’s first announcement of the new year is set for January 31. “The central bank is seen keeping interest rates steady at the first meeting of the year,” Hamrick says. “Investors, however, are betting that the Fed will begin to reduce rates in March. But that’s still one meeting away, and there’s a lot of data on inflation and employment due before that announcement.”

Here’s a peek into how inflation affects the housing market.

Inflation and the housing market now

Despite this overall progress, the shelter category, which includes housing costs, continues to be a major contributor to the CPI’s monthly all-items increase. In fact, it accounted for more than half of the monthly all-items increase in December.

“Shelter and motor vehicle insurance continue to be the persistent trouble spots, extending the streak of outsized monthly increases,” says Greg McBride, CFA, chief financial analyst for Bankrate. “Shelter remains the largest contributor, responsible for more than half of this month’s increase in the headline CPI and more than two-thirds of the increase in core CPI over the past year.”

Shelter continues to be a persistent trouble spot.
— Greg McBride, Bankrate Chief Financial Analyst

Nationally, CoreLogic reports that home prices rose 5.2 percent year-over-year in November 2023 and 0.2 percent compared with the previous month; it forecasts that price growth will continue at a steady pace well into 2024. Meanwhile, Fannie Mae’s latest Home Purchase Sentiment Index (HPSI) increased by 2.9 points in December to 67.2, with an overwhelming 83 percent of respondents saying they believe it’s a bad time to buy a home.

That negative attitude is likely directly tied to today’s mortgage rates, which have eased a bit since hitting the 8 percent mark in October but remain stubbornly elevated despite the lower inflation. The current average 30-year fixed mortgage rate is 6.94 percent, according to Bankrate’s most recent data.

“A big wildcard this year involves the questions associated with what happens with mortgage rates and the supply of homes for sale,” says Hamrick. “If we see a continued and more substantial drop in mortgage rates, that could in turn compel more current owners to move, putting their homes on the market. Ultimately, that could ease some of the upward pressure on home prices, which would undo some of the damage inflicted on housing affordability over the past several years.”

What it means for buyers and sellers

Among these decidedly mixed signals, should you buy a home now, or wait? What about selling your home now?

For homebuyers

Low inventory remains a problem for potential buyers across the country. According to the most recent existing home sales data from the National Association of Realtors (NAR), the country had a 3.5-month supply of housing inventory in November, still significantly below the 5 to 6 months that would be needed for a balanced market.

It’s OK to wait things out instead of buying now to beat further increases, especially if you’re a first-time homebuyer. While you’d be putting off building equity, you might find you’re in a better position to buy in the future, as the market continues to cool and your income can potentially grow.

Even when inflation does come down on a consistent basis, it doesn’t mean prices falling; it just means prices not rising as fast.
— Greg McBride, Bankrate Chief Financial Analyst

“Even when inflation does come down on a consistent basis, it doesn’t mean prices falling; it just means prices not rising as fast,” says McBride. “For homebuyers, a more modest pace of appreciation, or even a period of stagnant home prices, can allow for incomes to grow further. Rather than stretching too much now, you may be able to buy a bit more comfortably in a couple of years if your income growth outpaces home price growth. But there are no guarantees.”

That said, life circumstances might require you to buy a home now, regardless of market trends, and that’s as good a reason as any. Just make sure you plan to stay in the home for long enough to come out ahead when you eventually sell.

For home sellers

The ongoing housing shortage may provide an opportunity for sellers to get a better price for their homes. This is good news, but keep in mind that if you then need to buy a new home, the tables will turn, and you’ll be subject to the same circumstances — and high mortgage rates — as other buyers.

And remember, location matters. The nationwide median home-sale price was $387,600 in November, according to NAR, but prices vary greatly from one area to the next. So, depending on where you live, you could find fewer takers or need to come down on price.

Homebuying tips when prices are high

If you’re set on buying soon, here are a few ways you can stretch your housing budget:

  • Put your down payment savings in a high-yield account: One upside to inflation and the Fed’s many price hikes: higher interest rates on savings accounts. If you aren’t already, put the money you’re saving toward a down payment into a high-yield account. Just make sure the account allows you to access your money easily when it comes time for closing — some online savings accounts take three days to deliver your funds when you withdraw.
  • Consider a mortgage lender with low or no fees: While it might be more convenient to get a mortgage at your bank, banks typically charge an origination fee, often 1 percent of the amount you borrow. Many non-bank and online lenders don’t, so if you can find a no-fee lender with attractive rates, you’ll keep more money in your pocket.
  • Lock in your mortgage rate: When you find a lender and apply for a loan, ask about locking in your rate. Now’s not the time to take a chance on your monthly mortgage payment suddenly soaring in price, right before you’re set to close.

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