Inflation Comes for the Housing Market

Mortgage rates and housing prices are climbing again, a market dynamic that could bring strong economic headwinds during election season.Credit…Matt Rourke/Associated Press

Housing gloom

The higher-for-longer inflation predicament has hit the U.S. housing market like a thunderbolt. Home prices and mortgage rates are climbing again, dashing hopes that financing costs would fall this year and adding another economic question that could hang over the presidential election campaign.

More economists are paring their bets that the Fed will cut rates after the latest Consumer Price Index report.On Thursday, Goldman Sachs forecast two rate cuts (instead of three) this year; Bank of America and Deutsche Bank shifted from two cuts to one. They all argue that sticky inflation will force the Fed to keep borrowing costs higher for longer.

That would leave open the possibility that the Fed’s prime lending rates stays at, or close to, 5.5 percent, the highest in decades, through the spring and summer house-buying season. “March inflation figures were very bad, which also means bad news for interest rates,” Lawrence Yun, an economist at the National Association of Realtors, said after the C.P.I. report.

Housing volatility typifies the paradoxical U.S. economy. The country is growing faster than many peers, but voters are zeroing in on inflation to explain their disapproval of President Biden’s handling of the economy. (Some DealBook readers in recent days have emailed to say that they’re strongly feeling the pain of housing inflation.)

Biden is aware of the affordability problem. In the State of the Union address last month, he proposed $10,000 tax credits for first-time buyers and for homeowners who sell their “starter homes.” Also, a 6 percent agent’s commission fee — one of the world’s highest — is likely to go away after a landmark legal settlement.

Still, house prices are chugging higher. A dearth of new homes and a surge in demand for a more spacious dwelling that fits a work-from-home lifestyle have pushed the average price of a new home to $485,000 — up from $357,000 in 2021.