The CPI Inflation Rate Could Hit 9%. What Does That Mean for the Housing Market?

  • Home prices are in focus ahead of the CPI report due Wednesday.
  • Many are expecting even more aggressive price growth in June.
  • Some believe high inflation will prompt a strong monetary response, which could cool off the red-hot housing market.
CPI inflation - The CPI Inflation Rate Could Hit 9%. What Does That Mean for the Housing Market?

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Tomorrow’s Consumer Price Index (CPI) inflation report is expected to reflect accelerated price growth in the month of June. Many hopeful homebuyers will be watching the report closely to see if they should expect even higher mortgage rates as the housing market continues its upward march.

Economists and analysts everywhere have been clamoring over Wednesday’s inflation report since, well, last month’s CPI report. This is reasonable as the Federal Reserve reiterates the importance of lowering prices — as well as the lengths it’s willing to go to achieve that. Should inflation prove too stubborn, many expect the Fed to tighten monetary policy even further to ease prices. This has particularly profound effects on housing, which is still reeling from the last round of interest rate hikes.

Unfortunately, current estimates place June inflation at around 9%. This represents the largest leap in prices since May’s 8.5% jump, which was the greatest increase since 1981. As such, most expect the Fed to continue its hawkish agenda at its next open market meeting, scheduled for later this month. The central bank may well levy yet another 75-, or even 100-basis-point interest rate hike. This would add to the 1.5% increase they’ve already implemented this year.

The CPI report can be viewed as a sort of barometer for the overall health of the economy. With inflation expected to run hot, the figurative medicine is additional interest rate hikes. The housing market stands to change dramatically as a result.

As interest rates climb, mortgage rates will also continue rising, which has a number of implications for home prices.

What the CPI Inflation Report Mean for the Housing Market

Housing has been remarkably stubborn this year. Even as mortgage rates push 6% and mortgage applications drop more than 20%, home prices are still elevated. The undersupply of homes in the U.S. has meant that the cost to buy a home has only continued to grow despite rapidly deteriorating buying conditions. Indeed, the U.S. only has a roughly two-month supply of available homes for sale compared to the historical six-month average.

The housing market price resistance is also due to the jump in demand for homes that took root when the pandemic first hit and interest rates fell to zero. Even as rates have come back up, the pent-up demand for home still lingers.

Further rate hikes, however, may prove the feather, or perhaps, anvil, that broke the camel’s back. There’s already evidence that high mortgage rates are starting to take their toll on the housing market. A recent Redfin report found that home purchase agreement terminations hit nearly 15% in June, the highest level of all time ignoring March and April 2020.

On a macroeconomic level, fears are swirling that further rate hikes could prompt a recession. A nationwide economic downturn is one of the few paths that result in home prices actually dropping by possibly substantial amounts. Most economists agree, absent a recession, the housing market is likely too pinched to otherwise prompt a selloff. It’s unclear exactly what Wednesday’s CPI report will bring. Regardless, economists will be watching closely for evidence of a cooling real estate market.

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

With degrees in economics and journalism, Shrey Dua leverages his ample experience in media and reporting to contribute well-informed articles covering everything from financial regulation and the electric vehicle industry to the housing market and monetary policy. Shrey’s articles have featured in the likes of Morning Brew, Real Clear Markets, the Downline Podcast, and more.

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