Have you ever thought about how inflation affects the housing market? It might surprise you, but they're actually intertwined. Whenever one changes, the other gets influenced too. Let me give you a basic rundown of how they're connected.

The Relationship Between Housing Inflation and Overall Inflation

You know when we talk about shelter inflation? It's basically the fancy term for price growth specifically related to housing. They figure out these numbers by asking people who rent or own homes how much they're paying or would charge for rent. So basically, it's a way for the Bureau of Labor Statistics to keep tabs on how much housing costs are going up.

So, you know how overall inflation tells us how prices of stuff we buy every day are going up? Well, there's this thing called shelter inflation that focuses specifically on the cost of housing. And guess what? According to the latest survey, shelter inflation has been going down for the past four months in a row. Check out the graph below to see it visually!

You might be wondering why this is important. Well, here's the thing: shelter inflation is a big part of overall inflation, which is measured by the Consumer Price Index (CPI). So, when shelter inflation changes, it has a big impact on overall inflation. That means the recent decrease in shelter inflation could be a sign that overall inflation might go down in the coming months.

It would be really nice for the Federal Reserve (the Fed) to see some moderation. They've been busting their chops since early 2022 to get inflation under control. They've made some progress (it was at a crazy 8.9% last year at its highest), but they're still working on reaching their 2% target (the latest report shows it's at 3.3%).

Inflation and the Federal Funds Rate

What has the Fed been up to in order to tackle inflation? Well, they've been ramping up the Federal Funds Rate. You see, this interest rate has a big impact on how much banks have to pay when they borrow money from each other. When inflation started to climb, the Fed took action by raising the Federal Funds Rate, all in an effort to prevent the economy from getting too hot and bothered.

Take a look at this graph, okay? It basically shows us how inflation and the Federal Funds Rate are connected. See that blue line? That represents inflation, and whenever it starts to go up, the orange line, which represents the Federal Funds Rate, also goes up. Why? Well, the aim is for the Fed to bring inflation back down to their target of 2%.

So, check out this graph, right? The part that's circled? That shows when inflation went up real fast. And then the Fed was like, "Nah, we gotta do something about this." So, they raised the Federal Funds Rate to put a stop to it. And guess what? It actually worked! Inflation started to calm down after that. Now, as inflation is getting closer to the Fed's target rate of 2%, they might not have to raise the Federal Funds Rate much more. Pretty cool, huh?

A Brighter Future for Mortgage Rates?

So, what does all of this mean for you? Well, the things that the Fed does don't directly decide the mortgage rates, but they can still have an effect. According to Mortgage Professional America (MPA), here's how it works:

““. . . 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.””

— Mortgage Professional America (MPA)

You know, it's hard to say what's gonna happen with mortgage rates down the line. But, I gotta say, it's pretty reassuring to see the economy showing signs of inflation cooling off.

Bottom Line

If you're thinking about buying, selling, or just keeping up with the housing market, I'd love to chat with you. Let's connect and discuss all things real estate!rephrase it in a conversational way Whether you’re looking to buy, sell, or just stay informed about the housing market, let’s connect.