Inflation and the housing market: Decoding the latest numbers

New Consumer Price Index (CPI) data suggests that inflation is moderating. Over the past year, the all items index increased 2.4 percent before seasonal adjustment, according to the latest figures from the U.S. Bureau of Labor Statistics, released Oct. 10. This is down slightly from August’s 2.5 percent, edging closer to the Federal Reserve’s target inflation rate of 2 percent, and significantly lower than the high point of 9.1 percent in the summer of 2022.

In response to slowing inflation and weakening jobs data, the Federal Reserve cut rates by half a percentage point at its last meeting in September — a larger cut than some economists predicted. We could see at least one other Fed rate cut this year, according to Greg McBride, CFA, Bankrate’s chief financial analyst.

The housing market and inflation

The shelter category of the CPI, which includes housing costs, remains a stubbornly large contributor to inflation overall. In September, shelter increased 0.2 percent month-over-month — down from increases in July and August, but still at a rate of 4.9 percent over the past 12 months.

“Although both headline and core CPI came in above expectations for the month of September, we finally saw a more modest, and long overdue, increase in shelter costs,” says McBride. “One in a row is not a streak, but that is encouraging.”

“Shelter continues to be a contributor to the rise in the main gauge of prices at the retail level,” says Mark Hamrick, Bankrate’s senior economic analyst. “There is reason for optimism on this front if home-price gains moderate as expected. Having said that, there’s no dismissing the fact that housing affordability continues to be a major pain point for Americans.”

Nationally, CoreLogic’s most recent home-price analysis reports that home prices rose 3.9 percent from August 2023 to August 2024. It forecasts that price growth will continue, albeit more slowly, with an increase of 2.3 percent by August 2025. “While mortgage rates have dropped in recent weeks, August home sales were [affected] by still-high rates in July and August, which lowered affordability,” CoreLogic chief economist Selma Hepp said in a statement. “The combined impact of high prices and high mortgage rates kept a lid on price growth, with annual gains falling to the lowest level in a year and the monthly gain falling well below what is typically observed in August.”

Meanwhile, Fannie Mae’s latest Home Purchase Sentiment Index (HPSI) increased for the second month in a row in September to 73.9. A record 42 percent of respondents said they expect mortgage rates to decline in the next 12 months. Sixty-five percent of respondents said they think now is a good time to sell a home.

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

Housing inventory, while improving, remains a problem for potential buyers across the country. According to the most recent existing home sales data from the National Association of Realtors, the country had a 4.2-month supply of inventory in August — an increase over recent months, but still below the 5 to 6 months needed for a balanced market.

In addition, home prices continue to rise, with NAR’s median sale price in August at $416,700. That marks a record for August and 14 straight months of year-over-year price increases.

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 cools 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,” 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. While August’s median sale price was the highest seen in August, not every location is experiencing the same level of price growth. Regionally, the South and the West saw lower year-over-year price increases than the Midwest and Northeast, according to NAR. So, depending on where you live, the local market could be cooler or hotter than average.

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 rate 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.