Most people have noticed the rising cost of eggs at the grocery store.
But what does that have to do with buying a home?
The answer lies in the complex relationship between inflation, mortgage rates, and home prices. Understanding this connection can help explain why the dream of owning a home seems harder to reach for many.
Inflation and Home Prices: The Basics
Inflation means prices are rising on everything—from the food we buy to the cost of housing. When inflation goes up, the value of money decreases, meaning you get less for the same amount. This impacts homebuyers because it can either drive up the cost of homes or increase mortgage rates which in turn increase monthly mortgage payments. If building materials and labor become more expensive, new homes cost more to build, and those higher costs are passed on to buyers. Alternatively, if mortgage rates continue to increase, this increases the cost of your monthly payments.
Inflation affects how much buyers can afford. When prices go up on everyday goods, it can be harder to save for a down payment or cover monthly expenses, leaving less money for a home. So, rising inflation contributes to both higher home prices and less purchasing power for buyers.
Mortgage Rates and Why They Matter
Mortgage rates are the interest rates you pay on loans used to buy a home. These rates are usually tied to the overall economy, particularly the actions of the Federal Reserve (the Fed), which controls short-term interest rates. When the Fed raises rates, borrowing money becomes more expensive, and mortgage rates tend to rise. Conversely, when the Fed lowers rates, mortgage rates usually drop as well.
However, mortgage rates don’t always follow the Fed’s actions directly. Even though the Fed cut its rates last year to fight inflation, mortgage rates didn’t drop the same way. This happens because mortgage rates are influenced by long-term economic factors, like expectations for inflation and the overall strength of the economy. If investors believe inflation will stay high, they demand higher returns on long-term bonds, which leads to higher mortgage rates.
Why Mortgage Rates Didn’t Fall with the Fed’s Rate Cuts
You might wonder why mortgage rates didn’t decrease as expected when the Fed cut its short-term rates. The reason is that mortgage rates are influenced by more than just the Fed's decisions. They are also driven by what investors expect to happen in the economy in the long run. If inflation is still high or expected to remain high, mortgage rates will stay elevated—even if the Fed lowers rates in the short term.
In short, mortgage rates are not directly tied to the Fed’s rate cuts because they reflect longer-term economic conditions, such as inflation and the cost of borrowing money for extended periods. In other words, lending institutions are hedging against risk.
What This Means for You
The high cost of eggs and the high cost of purchasing homes are both symptoms of inflation. While rising costs and interest rates make it harder to buy a house, they also show how interconnected our economy is. Mortgage rates, which influence your ability to afford a home, don’t always align with what the Fed does, making the housing market difficult to navigate.
If you’re trying to buy a home, understanding how inflation, mortgage rates, and home prices work together can help you make more informed decisions about your finances and when to jump into the market. In today’s economy, buying a home may require more than just saving for a down payment—it’s about understanding the bigger financial picture.
And there is light at the end of the tunnel. With mortgage rates increasing, this does put pressure on home prices. Interest rates and home prices are inversely related...so even though you're stuck with a higher interest rate, the hope is that your real estate agent can negotiate a good deal on the price!
Reach out today to learn how I can do this for YOU!
