close
close

Inflation is declining, but the real estate market is not keeping up

Andrea Riquier
| USA TODAY

play

Mitchell and Kathryn Cox, two professionals in their mid-20s from Savannah, Georgia, thought they had entered the rental market at “the worst possible time” because skyrocketing prices were driving their monthly costs more than 50 percent higher than those of their friends and relatives who had signed leases just a few years earlier.

Then the Coxes started looking for a house.

“We did our research and knew what trends were emerging, so we weren't so much surprised by the prices as disappointed,” Mitchell said, adding that after months of searching, the couple bought a house that was smaller than they had hoped. “We were constantly comparing the home prices and mortgage rates of our relatives who had bought just a few years earlier. We were just too late to the real estate business.”

Across the country, high housing costs are turning the normal rite of passage for a young couple into a game of dare and chance. Consumer prices continued to fall in July, the Labor Department said Wednesday. Housing costs, however, rose 5.1 percent from a year earlier, accounting for nearly 90 percent of the increase in overall inflation.

Data from real estate brokerage Redfin shows that average home purchase prices rose more than 4% nationwide in the 12 months through July. Earlier this month, the government reported that average hourly wages overall rose 3.6%.

“The (housing) market is unforgiving,” said Michael Neal, a senior fellow at the Urban Institute's Housing Finance Policy Center in Washington, D.C. Neal believes housing affordability problems are undermining overall economic growth by hampering sales and construction.

Consumer Price Index (CPI): The CPI report for July is out: What do the latest data mean for the US economy?

High prices and interest rates make decisions difficult

A combination of higher prices and higher fees meant the Coxes had to make some difficult choices. They could have the location they wanted or the size they wanted, but not both.

Ultimately, they decided on a “small but cozy” home in an area they liked, trading their old 2 bedroom, 2 bathroom home for a 2 bedroom, 1 bathroom home with nearly 200 square feet less.

“We are fortunate to be in a good enough financial position to be able to afford a home,” Mitchell said. “I realize not many people can do the same. It takes hard work and, frankly, a little bit of luck.”

Like many other experts, Redfin chief economist Daryl Fairweather believes the inflation numbers released Wednesday strengthen the case for the Federal Reserve to start cutting interest rates as early as September. That would provide relief to the stagnant market, she believes, and we should see “significantly” better activity by next spring.

But higher prices don't just hold back potential buyers. A smaller pool of buyers isn't good for sellers either, says Justin Vold, a Redfin agent in Los Angeles. “It's in the seller's best interest to price high enough to get multiple offers. Getting just one offer sounds great, but anything can happen.”

Vold has seen several deals fall through in recent months. If interest rates rise even slightly between the time the deal is tentatively approved and the time it closes, the deal can fall through. For this reason, he often advises buyers to look for homes that are well under their budget. But that's easier said than done, especially in the most expensive areas of the country.

Homeowners and buyers should look for opportunities

Fairweather recommends prospective buyers keep an eye on prices and offers to decide when they're ready to enter the market. And homeowners who have recently purchased should also look for opportunities to refinance their property at lower rates once they've built up enough equity.

Wednesday's inflation data is “just another reminder of how important the housing market is to the economy, both in terms of prices and real activity,” said Neal of the Urban Institute. More specifically, Neal said, it is an indication of how tight supply is in the housing market at all levels and price points.

You may also like...