Change is the new norm for this year’s housing market. President Trump called for a review of the Dodd-Frank Act, FHA mortgage insurance premium cuts were suspended, and now the year’s inflation forecast is no different. In fact, according to Freddie Mac’s latest outlook on inflation and the housing market, consumer price inflation has started rising—but it might not continue throughout the rest of the year.

To completely understand the relationship between consumer price inflation and the housing market, it’s first important to comprehend how inflation works. Inflation is formally defined as a “substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency.” Basically, as inflation goes up, monetary value goes down.

So, with rising inflation, we could expect to see higher real estate prices. When this happens, fiscal policy rapidly expands, usually leading to major tax cuts and new infrastructure bills. It may even cause inflation rates to climb higher. This has a negative impact on the overall housing market, as home sales and mortgage loan originations usually decline.         

Another possibility in Freddie Mac’s forecast is that major inflationary changes have already baked in. With this option, “fiscal stimulus policy passes leading to a steady rise in inflation as per expectations. Most of the short-term rate increases have been anticipated in long-term yields leading to a flattening of the yield curve.”

With the third possibility, inflation retrenches, falling inflation rates could spark home sales throughout the country, as home prices begin to decrease.

According to Sean Becketti, Chief Economist of Freddie Mac, “which course inflation takes over the next year will have important implications for housing and mortgage markets. On balance, the risks to higher inflation outweigh lower inflation, but in our estimation, most of the reflationary factors have already been baked into current interest rates and inflation is likely to increase only modestly over the next two years.”

Although the most likely possibility is for inflation to modestly grow throughout the next couple of years, it’s important to remember that the housing market is still a great investment because mortgage rates remain historically low. For more information about inflation and the housing market, or to learn more about home financing, contact one of our mortgage specialists today.