How Inflation Affects the Housing Market

August 31, 2023

Have you ever wondered how inflation impacts the housing market? Believe it or not, they’re connected. Whenever there are changes to one, both are affected. Here’s a high-level overview of the connection between the two.

The Relationship Between Housing Inflation and Overall Inflation

Shelter inflation is the measure of price growth specific to housing. It comes from a survey of renters and homeowners that’s done by the Bureau of Labor Statistics (BLS). The survey asks renters how much they’re paying in rent, and homeowners how much they’d rent their homes for, if they weren’t living in them.

Much like overall inflation measures the cost of everyday items, shelter inflation measures the cost of housing. And for four consecutive months, based on that survey, shelter inflation has been coming down (see graph below):

Why does this matter? Well, shelter inflation makes up about one-third of overall inflation, as measured by the Consumer Price Index (CPI). So, when shelter inflation moves, it leads to noticeable moves in overall inflation. That means the recent dip in shelter inflation might be a sign that overall inflation could fall in the months ahead.

That moderation would be a welcome sight for the Federal Reserve (the Fed). They’ve been working to get inflation under control since early 2022. While they’ve made some headway (it peaked at 8.9% in the middle of last year), they’re still trying to get to their 2% goal (the latest report is 3.3%).

Inflation and the Federal Funds Rate

What’s the Fed been doing to lower inflation? They’ve been increasing the Federal Funds Rate. That interest rate influences how much it costs banks to borrow money from each other. When inflation climbed, the Fed responded by raising the Federal Funds Rate to keep the economy from overheating.

The graph below shows the relationship between the two. Each time inflation (shown in the blue line) starts to climb, the Fed raises the Federal Funds Rate (shown in the orange line) to try to get it back to their target of 2% (see below):

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“. . . mortgage rates and inflation are connected, however indirectly. When inflation rises, mortgage rates rise to keep up with the value of the US dollar. When inflation drops, mortgage rates follow suit.”

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Bottom Line

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– Marcus Bruno
Real Estate Broker
Bruno Fine Properties
(281) 969-3817

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About the Broker/Owner

Marcus Bruno

I am a licensed real estate broker with over 20 years of experience in the industry. I started my career in 2000 as a real estate agent, and in 2010 I became a broker. I have a passion for helping people find their dream homes and negotiate the best deals. I specialize in residential real estate, and I have extensive knowledge of the local market and trends. In 2015, I moved to Houston with my family and in 2018 opened Bruno Fine Properties Inc, a real estate brokerage that serves the Spring area and surrounding communities. I am a proud father of five beautiful girls, and I have been happily married to my wife Malika Bruno since 2003. When I am not working, I enjoy spending time with my family, playing golf, and reading. I am always eager to meet new clients and look forward to sharing my knowledge.

Remarkable service for remarkable you!

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You were accessible. I could call on you anytime and, if you were not available at that moment, you returned each call and email as soon as you were available. You were never rude to me or made me feel I was intruding. Not even when I'd call you on a Saturday or Sunday afternoon after I found a property that looked interesting and wanted more information on it.

Karen Beasley

Outside of real estate knowledge (which is important...), Marcus brought a "human" component to my house search. I was consistently being out-bid and I was becoming frustrated and despondent. He was able to keep me motivated and I ended up with a gem of house that has now almost doubled in value. He had patience with the situation and with me...I know I can be a handful :)

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I wanted to write you to tell you how much your experience in real estate made my purchase of a house so easy. Your ability to qualify me for a house was fast, and by using your website, I was able to make my selection of houses from my home. And after I chose the house you did the rest: inspections, appraisal and finally the loan. Even settlement was a breeze-you made it all happen smoothly.

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Marcus paid particular attention to our specific needs in the selling of our condo. He kept our requirements in mind and provided precise and professional advice to assist us when we had to take decisions. However, what we found most helpful among the services he provided was his explanation of the entire process as we went along. He was able to answer each question in detail, and indicate the next steps to be taken.

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When we decided to sell our home and look for a new one, we firmly resolved not to make any compromises and to settle only for the house we really wanted, with all the attributes we chose as ideal. We realized this would take a good while, and so we warned our agent that he needed to be very patient; we did not want to feel rushed. It took two whole years to find the house of our dreams and Mr. Bruno stayed the course all the way. He is like Job: perseverant to the end. Note that we only wrote one contract on a house, and it was for the one we bought, thanks to the help and guidance of our agent.