Housing costs continue to drive inflation even as food price hikes slow

Mitchell and Kathryn Cox, mid-20s professionals in Savannah, Georgia, thought that they’d entered the rental market “at the worst time possible,” with skyrocketing prices pushing their monthly cost up more than 50% higher than their friends and relatives who’d gotten into leases just a few years earlier. 

Then the Coxes started to house hunt.  

“We were doing a good bit of research and we knew where everything was trending so we weren’t surprised by the prices as much as we were disappointed,” Mitchell said, adding that after months of searching, the couple bought a home that was smaller than what they'd hoped for. “We kept comparing the home prices and mortgage rates of our relatives that bought just a few years before. We were just late on the home game.” 

Around the country, high housing costs are turning a normal rite of passage for a young couple into a game of grit and chance. Consumer prices continued to cool in July, the Department of Labor said Wednesday. But shelter costs were 5.1% higher compared to a year ago, accounting for nearly 90% of the gain in overall inflation. 

Data from real estate brokerage Redfin show that median home purchase prices nationally were up over 4% in the 12 months to July. Earlier this month, the government reported that overall average hourly earnings rose 3.6%. 

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“The (housing) market has been savage,” said Michael Neal, a senior fellow at the Housing Finance Policy Center at the Washington DC-based Urban Institute. Neal believes affordability challenges in housing are undermining overall economic growth by suppressing sales and construction.  

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High prices and interest rates make for hard choices

A combination of higher prices and higher rates meant the Coxes had to make some hard decisions. They could have the location they wanted or the amount of space, but not both.

Ultimately, they opted for a “small but cozy” house in a neighborhood they loved, trading down from a 2-bedroom, 2-bath, to a 2-bedroom 1-bath with nearly 200 fewer square feet.  

“We are blessed to be in the financial situation we are to be able to afford a home,” Mitchell said. “I recognize that not a lot of people can do the same thing. It takes diligence and honestly some luck.” 

Like many other experts, Redfin chief economist Daryl Fairweather believes the inflation figures out Wednesday solidify the case for the Federal Reserve to begin cutting interest rates as soon as September. That will grant relief to a stalled market, she thinks, and we should see “significantly” better activity by next spring.  

Higher prices aren’t just holding back would-be buyers, however. A smaller buyer pool isn’t good for sellers either, said Justin Vold, a Redfin agent in Los Angeles. “It’s in the seller’s best interest to price well enough to get multiple offers. Getting only one offer sounds great, but anything can happen.”  

Vold has seen multiple deals fall apart in recent months. If interest rates move even slightly higher between the time that a buyer gets preapproved and when the deal goes to close, it may fall apart. For that reason, he often counsels buyers to house hunt at price points well below their budget, an approach that may be easier said than done, especially in the most expensive areas of the country.  

Homeowners and buyers should keep an eye out for opportunities

Right now, Fairweather says would-be buyers should be watching rates and listings to decide when they’re comfortable jumping into the market, she said. And homeowners who bought recently should also look for opportunities to refinance to lower rates if they’ve accrued enough equity. 

Wednesday’s inflation data is “just another reminder of how important housing is to the economy both in terms of prices and real activity,” the Urban Institute’s Neal said. More to the point, he says, it’s a reminder of just how starved for supply the housing market is at all levels and price points.