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

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Although price inflation eased a bit in July, homebuyers and sellers still continue to face the harsh reality that home prices — which are showing signs of cooling down this year — are still very high. The question for house hunters now: Should you wait out this period of elevated prices?

What the inflation report revealed

The headline inflation number clocked in year over year at 8.5 percent last month compared with 8.9 percent in June, a slight improvement but still affecting everything from what you pay at the pump to the cost of housing. That includes mortgage rates, which were on track to 6 percent in June, but in the past four weeks retreated to the mid-5s.

To bring inflation back to Earth, the Federal Reserve has been steadily raising rates — four times so far this year, with the latest hike at the end of July. Those actions have indirectly influenced mortgage rates.

“Shelter costs are still rising at a knee-buckling pace, and accounted for 40 percent of the increase in the core CPI. Change in rent prices, in particular, tend to lag increases in home prices so we can expect to see continued moves higher for months to come in what is the biggest component of the inflation index,” says Greg McBride, chief financial analyst for Bankrate.

While we might not see as dramatic an increase in rates for the remainder of the year, the recent uptick drove monthly mortgage payments up 51 percent since last May, according to the National Association of Realtors index for the second quarter. That, coupled with growing home prices, spells “unaffordable,” especially for first-time homebuyers.

What’s happening in the housing market now

Nationally, home prices rose 18.3 percent year-over-year in June, CoreLogic reports. While climbing mortgage rates should’ve slowed the trend, housing inventory is still tight, and inflation isn’t helping matters.

That imbalance is translating to apprehension for homebuyers, who already had limited options at an affordable price, and have less purchasing power with higher rates today. A Fannie Mae index measuring home purchase sentiment recently hit its lowest reading in 10 years.

Home sellers aren’t feeling as good about their prospects, either.

“Interestingly, consumers’ perceptions of home-selling conditions declined meaningfully in June, returning to pre-pandemic levels,” said Doug Duncan, senior vice president and chief economist for Fannie Mae, in a statement in July. “This was particularly true for homeowner respondents. At the same time, consumers, especially those in prime homebuying groups, appear to be feeling the affordability pinch of higher mortgage rates: Approximately half of all respondents indicated that it would be ‘difficult’ to get a mortgage, the highest such percentage since 2014.”

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.

“Inflation coming back down 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, 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 a bit. 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 rate – When you find a lender and are ready to apply for a loan, ask about locking in your rate. While rates have come down slightly, it’s still taking buyers some time to find a home. Now’s not the time to take a chance on an unexpectedly unaffordable mortgage payment.
Written by
Suzanne De Vita
Mortgage editor
Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters.
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