Inflation in the US Housing Market

By: C. Oliveira

Current trends are illustrating a period of inflation, and with it, consequences on homeowner and potential buyers in the U.S housing market. As interest rates increase, the housing market faces specific and unique challenges, which could further enhance inflationary pressures, raising concern throughout the nation.
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The U.S. has seen a noticeable increase in mortgage rates. According to data from the Federal Home Loan Mortgage Association, the 30-year fixed-rate mortgage averaged 6.88% as of mid-April 2023, a rise from 6.27% just a year prior. House prices increased at an annualised pace of 15% in the second quarter of the year, according to the S&P Case-Shiller Index, a benchmark for American property prices. Consequently, the percentage of monthly household income spent on mortgage payments by the median family buying a median home doubled from 14% in 2020 to nearly 29% in June 2023, marking the highest percentage since 1985 according to the National Association of Realtors.

Additionally, this increase in rates is contributing to a cooling demand for homes, which is followed by a reluctance to sell, thus decreasing supply. “The higher rates go, the more demand falls. This is going to catch up with the homebuilders pretty quickly," explains John Burns, a noted property consultant. The drop in supply is primarily because homeowners who got low-interest mortgages before the Fed raised rates have no desire to give them up, and so are unwilling to sell their homes. Amidst rising rates, many homeowners are choosing to invest in their current properties rather than moving. This trend is particularly influenced by the increase in remote work, which led to an increase in home office renovations. Remodeling expenditures in 2022 reached nearly $570bn, or about 2% of GDP, up by 40% in nominal terms from 2019 according to the Joint Centre for Housing Studies at Harvard University. Hence, the reluctance to sell and the boosted investment in home renovations are contributing to an overheating economy. A sustained rebound in prices would also complicate the inflation outlook, and with housing becoming increasingly unaffordable, many individuals are pushed into the rental market, driving up rents and adding to inflationary pressures.

Financial institutions like Goldman Sachs and Bank of America have adjusted their forecasts regarding the Federal Reserve's actions. Goldman Sachs changed their forecast from three interest rate cuts to two for this year; Bank of America and Deutsche Bank shifted from two cuts to one. They all argue that sticky inflation will force the Fed to keep borrowing costs higher for longer.

The scarcity of available homes remains a significant barrier, particularly for first-time buyers. The main issue continues to be that supply is not keeping up with demand, making homeownership increasingly unattainable for many Americans. This ongoing shortage keeps the housing market less accessible and more competitive, maintaining home prices high despite broader economic fluctuations.