Housing Versus Inflation Control

As the Federal Reserve continues their campaign to reign in inflation that is ravaging consumers worldwide, there is one market that looks to remain resilient. That market is the real estate market. In fact, home prices continue to creep higher month over month, even as mortgage rates surge to start the year. And now that we have seen a rise in mortgage rates, they are becoming priced in to analysts projections that still show higher prices to come. The seasonally adjusted median home sales price continued upward in April, rising 3.6% from the month prior. This is even as mortgage rates surged through March and April. Here is the outlook on housing versus inflation control.

Surging Prices

The pace to which home prices in the United States are increasing is alarming. In fact, after the accelerated pace was originally slowing, we saw a sharp rise in prices as the spring selling season arrived. This rise in home prices will continue to counteract the Federal Reserve and their efforts to slow price acceleration across all markets. With the seasonally adjusted median home price increasing by close to 4% in April 2022, it is hard to say if home price increases are “decelerating.” This is the largest increase month-over-month since Zillow has tracked the data, dating back to 2012. While people talk about how home price growth is decelerating, the hard data shows otherwise.

Still An Inventory Problem…

With inventory slowing creeping up, but still low enough to vastly be outdone by demand, it is continuing to be the driving factor in the housing price appreciation. For buyers, this can be extremely irritating, and even turn some would-be buyers to renters. Now that mortgage rates are soaring alongside prices, it will be very daunting for first-time home buyers to make that leap to homeownership. According to Johnathan Levin at Bloomberg,

“The inertia of housing — a large component of the indexes used to track inflation — means that consumer prices are likely to stay higher for longer. That will dare Fed Chair Jerome Powell to raise interest rates even more aggressively. Increasingly, this looks as if it won’t end well.”

For those who follow investment vehicles such as stocks and bonds, it is important to know that fighting the Federal Reserve tends to get you torched. However, if you look at the housing market in 2022, you can see that it is doing exactly that. Real estate continues to appreciate and lead to housing and cost-of-living inflation, even as stocks and bonds have both tumbled. For the Federal Reserve to achieve the soft-landing it is so desperately after, it will need the housing market to play along. To do so, housing price appreciation would need to slow, which is typically done by tightening monetary policy. However, housing could be tricky, and price appreciations could last for months.

Smells Like 2008?

If you were old enough to remember and be impacted by the crash of 2008, you might be familiar with the term ARM (adjustable-rate mortgages). These mortgages originally offer lower initial rates, which would be beneficial in today’s high-rate environment. This does, however, leave these buyers vulnerable to higher rates when their introductory period does end. ARMs have started to tick up this year, as mortgage rates have increased. They have reached their highest percentage of loan-makeup in the market since 2008.

Housing Versus Inflation Control: A Supply Problem

Finally, the record demand we have seen has led to a historic housing shortage. With a near-record low inventory, housing will continue to make the Federal Reserve’s job significantly harder. There is no easy fix to the housing shortage either. According to Senior Economist Jeff Tucker at Zillow, inventory might take until September 2024 to return to 2019 levels. With homebuilders rushing to bring new homes to the market, they are still reaching problems in terms of their supply chain. With the cost of inputs increasing, new builds are also becoming more expensive as well. It is hard to ever obtain the materials needed to finish building a home. This has all led to the headache the Federal Reserve faces when trying to stop the housing market.