Inflation and the housing market: What you can do as prices spike

By Suzanne De Vita | Bankrate.com

Inflation isn't done with the American public yet.

After a modest, 0.1% rise in August, the Consumer Price Index rose 0.4 percent in September, led by large increases in the cost of food, medical care — and shelter.

While shelter rose 0.7 percent overall, both the rent index and the homeowners' equivalent rent index rose 0.8 percent in September. The latter is the largest monthly increase in that index since June 1990.

The Federal Reserve responded as it has all year with another interest rate hike. That means higher rates on many mortgage types, and — for homebuyers overall — continued elevated home prices in the months to come.

To bring inflation back to Earth, the Federal Reserve has been steadily raising rates — five times so far in 2022, with the latest hike on Sept. 22. Those actions have indirectly influenced mortgage rates, with the average 30-year fixed rate recently topping 7 percent. As of July, average monthly mortgage payments were up 50 percent year-over-year — from $1,240 (2021) to $1,861 (2022), according to the latest National Association of Realtors "Housing Affordability Index."

What's happening in the housing market now

Nationally, home prices rose 13.5 percent year-over-year in August, CoreLogic reports. While that represents a slowdown, it's still high by historical standards, and inflation isn't helping matters. In a persistent trend, both homebuyers and sellers feel less optimistic about their prospects, according to Fannie Mae's latest index.

"The HPSI [Home Purchase Sentiment Index] declined this month to its lowest level since October 2011," said Doug Duncan, Fannie Mae senior vice president and chief economist, in a statement. "Consumers' expectation that home prices will decrease matched a survey high, with a higher percentage of consumers believing home prices will decrease rather than increase over the next year – a shift in survey sentiment that had previously only happened in 2011 and at the start of the pandemic in 2020.

"Moreover, 75 percent of consumers still think it's a bad time to buy a home, with most citing high home prices and unfavorable economic and mortgage rate conditions as primary reasons."

Should you wait for inflation to come down?

With inflation still weighing on the economy and housing market, should you buy a home now? What about selling your home now?

If you can't make the numbers work, it's OK to wait things out instead of buying a home today to beat increased prices and rates, especially if you're a first-time buyer. While you'd be putting off building equity, you might find you're in a better position to buy in the future, when the market cools and your income potentially has had an opportunity to 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 Greg McBride, chief financial analyst for Bankrate. "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, and rents have certainly spiked in the meantime."

That said, the circumstances of your life might require you to buy a home now, and that's as acceptable a reason as any. Because you're buying at the peak or near-peak of the market, be prepared to stay in the home for a while if you want to come out ahead when you sell.

For sellers, the tides are turning. Depending on where you live, you could find fewer takers, or need to come down on price. Let's not forget what happens on the other side of the transaction: When you go to purchase your next place to live, you'll be competing for a limited number of available properties — and now likely obtaining a new mortgage at a higher rate, to boot.

If you're set on buying now, you can try stretching your dollars by:

—Putting your down-payment savings in a high-yield account. One upside to inflation and the Fed's response: higher interest rates on savings accounts. If you aren't already, put your down payment contributions in 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.

—Considering 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.

—Locking in your mortgage rate. When you find a lender and are applying 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.