Inflation continues to hurt bonds and Real Estate

Riding the Inflation Wave: How Two Years of Rising Prices are Shaping the Housing Market

In the span of just two years, a tide of inflation has swept across our economy, leaving its mark on every corner. Among the sectors feeling its impact, the real estate market stands as a notable example. As we journey through the effects of this inflation surge, it's clear that its consequences have been far-reaching, especially when it comes to home sales and financing.

The Inflation Surge: A Simple Story of Numbers

From August 2021 to August 2023, the cost of living, as measured by the Consumer Price Index (CPI), jumped considerably. In August 2021, the CPI was at 265.0, and by August 2023, it had climbed to 289.7. This means prices overall increased by roughly 9.3% during these two years. Such a substantial increase in such a short time has raised concerns about what this means for our economy.

How Homes and Financing are Feeling the Heat

In the world of real estate, the effects of this inflation surge are unmistakable. One noticeable change has been in home sales. As the prices of everyday items rise, people find it harder to afford big purchases, like homes. This has led to a slowdown in the growth of home sales. In fact, existing home sales have dropped by 5.8% from mid-2021 to mid-2023, showing the real impact of these rising prices on the housing market.

The way we finance our homes has also felt the squeeze. The Federal Reserve, which manages our country's money supply, has raised interest rates multiple times during these two years to try to control inflation. These rate increases have a ripple effect, making it more expensive to borrow money for a mortgage. For instance, in 2021, the federal funds rate was at 0.25%, but by 2023, it had risen to 1.5%. This makes it tougher for potential buyers to afford their dream homes.

Bond Prices: A Tug of War

The effects of inflation aren't just limited to homes and mortgages; they've reached the bond market too. Bonds are investments that can be impacted by inflation. Taking a closer look at the 10-year U.S. Treasury bond, a popular type of bond, its price has been swinging. Back in January 2021, it was valued at 100.88, but by August 2023, it had dropped to 92.51. This change happens because when inflation goes up, interest rates often follow, causing older bonds with lower interest rates to become less attractive.

The Bottom Line

The two-year surge in inflation has undoubtedly left its fingerprints on the real estate world. Home sales have cooled down due to less purchasing power, and securing financing has become trickier as interest rates rose. Even the usually stable bond market has felt the tremors. As we move forward, it's important to keep a close watch on how the intricate dance between inflation, home sales, financing, and investments continues to shape our economic landscape in the years ahead.