We’re all feeling the pinch at the gas pump and grocery store. Inflation has been on the rise and the recent conflict in the Middle East has pumped up oil and energy prices even more, causing increases in costs on goods with the potential to curb or decrease consumer spending.
Inflation and economic outlook affect every consumer market, and real estate is no exception. Increased costs can affect buyers’ spending powers and habits and change retirement or upscaling plans for many potential sellers.
Consumer habits aside, inflation and economic trends directly affect how the federal government sets interest rates, and this number can drastically change your monthly mortgage payment. The Fed uses interest rates to help moderate the economy, raising the rates to curb off inflation and spending and slackening the rates to help boost a slumping economy.
So how do today’s trends affect the coming outlook on the real estate market? Many see a rise in inflation as an inevitable opportunity for interest rates to rise too! But I caution everyone to look closer, and to try to answer the question of what’s next, let’s look at inflation rates and break them down.
The rate often covered in the media or found online is the PCE, or Personal Consumption Expenditures Price Index. This is a broad measurement that shows how much more people are paying for goods and services compared to the year before.
The PCE in April, the last released data, was +3.8%. To put that number into better context, the PCE over the last 60 years has averaged +3.3%. April’s number was a half-percentage point higher than the average and nearly 2% higher than the Federal Reserve’s long-run target of +2%.
OK. So I’ve spent two paragraphs quantifying what everyone is already feeling at the gas pumps and grocery stores. What gives?
Well, it’s also important to understand what the Feds are looking at regularly. There’s another statistic, called the core PCE, that tracks spending trends with gas and energy prices removed. The core PCE helps sharpen the image of our economy, which often can get blurred by short-term, volatile trends in gas and energy prices.
Comparing the core PCE with the PCE can be helpful when anticipating how the Feds might behave over the next six months. The core PCE for April was +3.3% compared to the +3.8%, a much more moderate increase than the headlines would suggest.
Now this doesn’t mean the Federal Reserve won’t raise interest rates, but it should cast a little doubt in those who think a rate hike is inevitable. This news isn’t great for homebuyers, though, as we aren’t at all likely to see rates drop anytime soon, and the best case scenario seems to be a status quo.
Of course, there are still a lot of things that need to be sorted out in the coming weeks and months that will help us gain a clearer picture about the economy and the Federal Reserve’s behavior.
No matter how things pan out for the rest of 2026, there are a couple things worth discussing further.
First, a tougher economy doesn’t equal a housing crash. It certainly changes the face of the market, but we’re not looking at conditions like the crash in 2008. Inventory remains low and homeowners continue to sit on lots of equity in their homes, making real estate a strong and viable asset for most.
The inflation numbers and interest rates certainly adjust buyers’ spending, which inevitably affects market prices. But homeownership isn’t out of reach. There are many different lending options, first-time buyer programs and other financing options that can help potential homebuyers with affordability.
Even with austere times, real estate remains a strong investment for folks. Home values continue to rise and for most homeowners, real estate remains the largest asset in their financial portfolio.
If the economy has made the buying process a little slower, it hasn’t dampened the market enough to make it no longer worth the wait. Homeowners always have the option of refinancing in the future, freeing themselves out of higher interest rates today and bringing down their monthly mortgage payments while continuing to gain equity in their homes.
If you have any real estate questions or want to see what your options are for buying in today’s market, send me a hello today!
