Inflation and the housing market: Decoding the latest numbers

Contrasting with falling rates over the past two months, the consumer price index (CPI) for January 2023 marked the largest increase since October 2022, showing that inflation can be a stubborn thing to control.

According to the latest seasonally adjusted numbers from the US Bureau of Labor Statistics, released Feb. 14, CPI rose 0.5 percent in January 2023 — compared to December 2022’s 0.1 percent and 0.2 percent increases percent in November last year. However, the 12-month unadjusted inflation rate increased by 6.4 percent between January 2022 and January 2023, compared to 6.5 percent between December 2021 and December 2022. While a 0.1 percent drop isn’t exactly groundbreaking, it’s still a fall .

At its first meeting of 2023, the Federal Reserve raised interest rates by a quarter of a percentage point — the smallest hike in many months. What will it do with this latest CPI information? We will know when it next meets in March. In the meantime, here’s a look at how inflation is affecting the housing market.

Inflation and the housing market now

The 0.4 percent monthly increase in CPI reflected the rise in the cost of things like auto insurance and clothing. But housing — the category that includes housing costs — saw one of the biggest increases. The protection index, which rose 0.7 percent, was a dominant factor in the index’s 0.4 percent monthly increase for all items excluding food and energy.

According to data from Bankrate, the current 30-year fixed-rate mortgage rate is 6.67 percent, up 21 basis points from the previous month’s rate of 6.46 percent. In comparison, between December 2022 and January 2023, the CPI rent index and the owner-equivalent rent index each increased by 0.7 percent (70 basis points).

Nationwide, home prices rose 6.9 percent year-on-year in December 2022, CoreLogic reports. While it’s still an increase, it’s much lower than the 8.6 percent year-on-year increase in November. The annual increase was 10.1 percent in October and 11.4 percent in September. This clearly represents a slowdown – although prices are still high.

The story goes on

Fannie Mae’s Home Purchase Sentiment Index (HPSI) rose 0.6 points to 61.6 in January, significantly less than last month’s rise of 3.7 points but still just above its all-time low of October 2022. Only 17 percent of respondents think it’s a good time to buy, mainly due to high interest rates and house prices. Year-on-year, the overall index fell by 10.2 points.

Consumers remain pessimistic

“The January HPSI results showed that consumer sentiment toward the housing market remains historically subdued,” said Doug Duncan, Fannie Mae’s senior vice president and chief economist, in a statement. “For consumers, the same affordability issues remain as they continue to point out that high home prices and high mortgage rates make it a ‘bad time’ to buy a home. Until we see affordability improvements, we expect home sales to remain subdued in the coming months.”

Should you wait for inflation to ease further?

With inflation still raging in the housing market, should you buy a home now or wait? How about selling the house now?

For homebuyers

If you can’t get the numbers to work, it’s okay to wait things out rather than buy a home today to beat the rise in prices and interest rates, especially if you’re a first-time buyer. While you’d put off building equity, you might find that you’re in a better position to buy going forward as the market continues to cool and your income can potentially increase.

“Even though inflation is constantly falling, that doesn’t mean prices are falling; it just means prices aren’t going up as fast,” said Greg McBride, CFA, chief financial analyst at Bankrate. “For homebuyers, a more modest pace of appreciation, or even a period of stagnant home prices, may allow for continued income growth. Rather than stretching too far now, you might be able to buy a little more comfortably in a few years when your income growth outstrips home price growth. But there are no guarantees and rents have certainly skyrocketed by now.”

That said, life circumstances could dictate that you buy a home now, regardless of market trends, and that’s as good a reason as any. But if you’re buying near the peak of the market, be prepared to stay home for a while if you want to get ahead of the sale.

For home sellers

The tide is beginning to turn for sellers. Depending on where you live, you may find fewer takers or need to lower the price. Don’t forget what’s happening on the other side of the transaction: when you buy your next place to live, you’ll be another buyer competing for a limited number of properties available — and now you’ll likely need a new mortgage at a higher rate to do so to boot.

Tips for buying a home when prices are high

If you’re looking to buy soon, here are some ways you can get your money’s worth:

• Invest your down payment savings in a high-yield account: One positive side of inflation and the Fed’s response: higher interest rates on savings accounts. If you aren’t already, put your deposit contributions into a high-yield account. Just make sure the account gives you easy access to your money when it’s time to close – some online savings accounts take three days to deliver your money when you withdraw it.

• Consider a low- or no-fee mortgage lender: While it may be more convenient to get a mortgage from your bank, banks typically charge a processing fee, often 1 percent of the loan amount. Many non-bank and online lenders do not do this. So if you can find a no-fee lender with attractive interest rates, you’ll keep more money in your pocket.

• Secure your mortgage interest rate: When you find a lender and apply for a loan, ask about locking your interest rate. Now is not the time to take chances if your monthly mortgage payments suddenly skyrocket just before you close.