This week’s Consumer Price Index (CPI) report showed inflation jumped 9.1% in June, surpassing even liberal estimates. Many anticipate today’s CPI figures will prompt another drastic interest rate hike at the Federal Reserve’s next meeting later this month. Rising interest rates present yet another cooling factor for the mostly red-hot housing market this year.

Prices didn’t just increase last month — they soared. The 9.1% year-over-year increase represents the fastest pace of growth for the index since this past May, which was the largest leap since 1981. Inflation has been top of mind for many economists and analysts, as it frequently informs the monetary decision-making of the Fed. In this case, the central bank could be compelled to levy yet another brutal rate hike, as high as 75 or even 100 basis points. Given the Fed’s cumulative 1.5% rate increase so far this year, the U.S. would be looking at up to 2.5% interest.

As interest rate climbed this year, mortgage rates have ramped up shockingly quick. 30-year fixed mortgage rates are trending over 5.5% as of today, up from 5.3% just last week and 3.1% at the start of the year. It’s still down a bit from the 13-year high of 5.81% from June, but with more rate hikes on the way, expect mortgages to follow suit.

Housing costs have mostly stayed high this year, but could be subject to change in response to more hefty borrowing costs.

Home Prices May Decline as Inflation Looms Large

The limited number of homes available in the U.S. has meant even as buying conditions rapidly deteriorated this year, home sellers have still largely managed to close over asking price. Things are starting to change, however, and fast.

According to the U.S. Department of Housing, the average sale price of a home sold in the U.S in the first quarter of this year was $507,800, the highest level ever recorded. Since then, market forces have aggressively shifted away from housing.

Mortgage applications have continued to fall week after week, as sales of previously-owned homes have dropped for four consecutive months. Earlier today, JPMorgan Chase reported that mortgage originations slipped 45% from last year. Moreover, 11% of U.S. homebuilders lowered prices from May to June, according to Zonda. Home sale cancellations hit 14.9% in June, the highest level since the start of the pandemic.

The lack of available homes for sale means it’s unlikely for housing to see the oft-mentioned crash. But should lending rates continue rising, fewer would-be home buyers will enter the market. This could result in a sort of rebalancing between supply and demand that could result in home prices easing dramatically.

Ali Wolf, chief economist for Zonda, commented on the state of housing in a recent email:

“Housing is an interest rate sensitive sector. As mortgage rates rose over the past couple of months, we saw buyers pull back in response to the higher housing costs. Many pundits emphasize home price levels, but ultimately, people buy homes based on the monthly payment. Rising home prices combined with higher mortgage rates are driving up the monthly mortgage payment, which is impacting housing affordability.”

Will the Housing Market Crash?

The elevated nature of homes in recent years has prompted some to make comparisons to the infamous 2008 housing market crash. The analogy isn’t outright ridiculous; home prices did grow by double digit percent rates in 2020 as interest rates fell to near-zero. They have continued to rise each quarter since then, much like the housing boom of the early 2000s. In many ways, however, the similarities end there.

Housing has continued to march upward largely due to the pinched supply of housing. The U.S. currently has about a two-month supply of available homes for sale in the U.S.; historically, the figure is closer to six months. As such, even as rates soar and housing demand slip, the lack of homes has propped up home costs. This is fundamentally different than the unethical lending practices that caused the 2008 crash.

The Fed has long referred to its current inflation-easing agenda as a “soft landing” for the country. The central bank is tasked with lowering inflation, largely by lowering aggregate demand for goods in the economy via interest rate hikes, without tanking the overall economy. Unfortunately, the country may well dip into a recession in order to pull back prices, which could lower the demand for housing enough to see prices drop as much as 5% to 10%.

Housing continues to be a murky sector as the wider economy operates in flux. Whether the Fed will go through with its potentially crushing rate hikes later this month remains to be seen.

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 InvestorPlace.com Publishing Guidelines.