Inflation Rate Increases to 8.5 Percent in March…What will the effect be on home prices?

This week it was announced that the U.S. inflation rate in March had increased to a staggering 8.5% the highest rate in over 40 years as illustrated by the chart below.  The last time the inflation rate was higher than this was in December 1981 when it hit 8.9%.   The “inflation rate” that I’m referring to, and is the most commonly reported, is based upon the Consumer Price Index for All Urban Consumers (CPI-U): U. S. city average.  One of the categories included in the CPI-U is “shelter”.  The report shows the shelter inflation rate at 5% which, on the surface sounds low however, the median price of homes sold in St Louis in March was $250,000 an increase of just over 4% from March 2021 when the median sold price was $240,000.

What does an inflation rate of 8.5% mean for the real estate market?

With everything going on in our economy, country and world now I think it’s literally impossible to predict what is going to happen on any front with any level of accuracy however, a good guide would be what has happened in the past during similar times.   With this in mind, lets look at what the market looked like the last time inflation was at this level, December 1981:

  • Mortgage interest-rates on a 30-year fixed mortgage were an average of 17%-18% (see chart below)
  • The inflation rate actually reached a peak of 14.4% in March of 1980
  • St Louis home prices peaked during the 1st quarter of 1979 then declined until bottoming-out during the 2nd quarter of 1981 (see chart at bottom)

Comparing today to the time period above we see that home prices started their decline in Q1 1979 about 12 months after the inflation rate had started its trend upward.  Currently, we are about 13 months into the inflation rate’s trend upward however it started at a lower than normal level.  Therefore we are about 6 months into the aggressive upward trend beyond normal levels.  Interest rates, just like in the 80s, have reacted quicker and have already increased over 1% in the past year and will no doubt continue to increase in the coming months.  Home prices, just based on my analysis at the beginning of this paragraph, have to be negatively impacted soon, real soon.  In fact, I think we’re already seeing it.  Watch for my next article where I’m going to do an in-depth analysis of St Louis home prices.  One caveat.  The inventory of homes for sale is still low and much lower than it was in the early ’80s so that will help prevent the impact on home prices from being as significant as it would if not for the short supply.

One thing is for sure….2022 will not be a dull year for real estate.  After 43 years in this business I’ll be honest, I was hoping to have some boredom in the market for a while but I guess that isn’t going to be the case.

CPI vs St Louis Home Price Index Chart (1981-Present)

(click on chart for live interactive chart)

CPI vs St Louis Home Price Index Chart


Mortgage Interest Rates – 1970-1995

(click on chart for live interactive chart and period of 1971-Present)

Mortgage Interest Rates - 1970-1995

CPI, Interest Rates and St Louis Home Price Index Chart (1984-1994)

(click on chart for live interactive chart)

CPI, Interest Rates and St Louis Home Price Index Chart (1984-1994)

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