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There are many reasons to buy or sell your home – downsizing, relocating for a job, etc. However, the economy and home values (sellers’ vs buyers’ market) can also impact your decision. Therefore, if you’re thinking about buying or selling your home, you may want to take some time to understand the correlation between inflation and home prices to determine if now is a good time to take that step.
We don’t pretend this is a comprehensive tutorial on inflation and the very complicated U.S. economy, but even a basic understanding can help you make more informed decisions.
The U.S. Bureau of Labor Statistics (BLS) explains, “The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.” The CPI is one of the most popular measures used to calculate the inflation rate.
While the overall inflation rate measures the cost of everyday items, shelter inflation is the measure of inflation specific to housing. It represents approximately “30% of the value of the basket of goods that the Bureau of Labor Statistics evaluates to put together the Consumer Price Index,” CNN Business explains. “For renters, shelter inflation includes rent and utility payments. For homeowners, the BLS looks at what it would cost to rent a similar house.”
Investopedia defines inflation as “a rise in prices, which can be translated as the decline of purchasing power [how many goods or services one unit of money can buy] over time. The rate at which purchasing power drops can be reflected in the average price increase of a basket of selected goods and services over some period of time. The rise in prices, which is often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.” Typically, the lower the inflation rate, the more buying power consumers have.
In September 2023, the inflation rate in the United States was 3.7%.
“The federal funds rate, or Fed rate, is the interest rate that U.S. banks pay one another to borrow or loan money overnight,” Nerd Wallet explains. “It also affects interest rates on everyday consumer products, such as credit cards or mortgages.” The Federal Open Market Committee (FOMC), part of the Federal Reserve System, sets this rate to keep inflation under control.
When inflation rises, the Fed typically responds by raising the Federal Funds Rate in an attempt to reach its target of a 2% inflation rate. This is precisely what happened in 2022 when the Fed began a cycle of interest rate hikes, raising rates from nearly zero to 5.5% as of this writing.
We have recently been in a sellers’ market with record-low interest rates, high home prices, and low inventory. “As of July 2023, the median sale price for an existing home in the U.S. was a steep $406,700, the highest July price the National Association of Realtors (NAR) has ever recorded and just $7,000 short of the all-time record,” Bankrate reports. “And as of late August, the average 30-year mortgage rate had hit 7.36 percent — higher than it’s been in more than 20 years.”
Since mortgage rates have increased (and may continue to do so), will we see a shift from a sellers’ to a buyers’ market? Maybe. The interest rate alone does not determine the housing market.
Factors that determine the type of housing market (sellers’ vs buyers’) we’re in:
“The combination of high mortgage rates, steep home prices and low inventory levels are lining up to make the 2024 housing market a challenging one for both buyers and sellers,” one expert predicts. “But if rates cool in 2024, as some experts predict, then market activity should heat up in response.”
Now, more than ever, it’s a good idea to rely on the guidance of an experienced local real estate agent if you’re thinking about buying or selling your home. Pete Heim can help you determine if now is the right time for you to buy or sell your home, and if it is, help you buy or sell faster and for a better price.
Contact him today at 610-745-3378 or 610-898-1441 or connect with him online.
Pete Heim is consistently ranked among the best real estate agents in Berks County. He's been serving Berks County buyers and sellers with pride for over 35 years. Put his experience to work for you!
