Inflation and San Diego’s Housing Market

Have you ever sat down and just thought about the ripple effect of inflation on San Diego’s housing market in general? Well, the two are more intertwined and correlated than you might think. A shift in one often signals a change in the other and of course vice versa. Let’s go ahead and dive in with us as we explore this intricate relationship and try to understand it together.

Decoding Housing Inflation: A San Diego Perspective

Housing inflation, often termed ‘shelter inflation,’ gauges the growth or increase in housing prices. The Bureau of Labor Statistics (BLS) conducts a survey where renters disclose how much they pay for their monthly rent, and homeowners estimate the rental value of their homes. Just as general inflation gives us insights into the fluctuating costs of daily goods and services, shelter inflation shines a light on shelter costs. Recent trusted data reveals a staggering decline in housing inflation over the past four months which was quite a breath of fresh air if you are going to refer to the data below.  As you can see from the survey results housing inflation has been on a constant rise for the past few years and was finally seeing some downward slopes this year.

Now, the big question arises: Why is this significant for San Diego residents or even the masses in general? Housing inflation contributes to roughly a third of portion on the overall inflation in total, as indicated by the Consumer Price Index (CPI). A dip in housing inflation could hint at a potential decrease in overall inflation, offering that sigh of relief to our local economy in the months ahead.

The Federal Reserve has been striving to rein in inflation ever since 2022. Their efforts have seen some success, with inflation rates dropping from a peak of 8.9% to a current 3.3%. However, the ultimate goal remains a stable 2%.

The Federal Funds Rate: The Fed’s Tool Against Inflation

To combat the rising inflation, the Federal Reserve has been adjusting the Federal Funds Rate. This rate determines the cost for banks to lend and borrow money from each other. As inflation soared, the Fed countered this by hiking the Federal Funds Rate, ensuring the economy remained balanced and stable. To understand this further, let’s base it on the graph below; the blue line refers to Inflation and the orange line refers to the Fed Funds rate,

The graph above illustrates and gives us an idea of the Fed’s proactive approach. Whenever inflation surges, the Federal Funds Rate is adjusted to bring it closer to its usual 2% target. The recent moderation in inflation suggests that we might see fewer rate hikes in the near future.

What Does This Mean for San Diego’s Mortgage Rates?

While the Federal Reserve’s decisions don’t directly set mortgage rates, they certainly influence and set a certain standard for them.
As explained by Mortgage Professional America (MPA):

“mortgage rates and inflation are connected, however indirectly. When inflation rises, mortgage rates rise to keep up with the value of the US dollar. When inflation drops, mortgage rates follow suit.”

For potential homeowners in San Diego, the current trend of moderating inflation brings a glimmer of hope for more favorable mortgage rates in the near future. This is good news and totally in your favor.

Conclusion:

Whether you are looking to invest, maybe thinking of buying or selling a home, or just want to keep your finger on the real estate pulse, Now is a great time for a conversation. Feel free to reach out to the McT Real Estate Group for any of your real estate needs here in San Diego; we’re happy to help!