When it comes to inflation, the real estate market is a bit of a different animal, according to experts.

“Real estate is a very unique marketplace, and it’s driven very much by supply and demand,” said John Petrack, executive vice president for the Realtors Association of Metropolitan Pittsburgh, who’s been in the industry for nearly half a century. “If you put 5,000 houses on the market today in the Greater Pittsburgh area, prices would fall. Unfortunately, the last four or five years, the market has been in very short supply.”

It’s a trend that is mirrored nationally.

“The National Association of Realtors’ chief economist has continued to say recently that the U.S. is about 5 million homes short of what it needs,” said Kim Shindle, communications director for the Pennsylvania Association of Realtors. “And, in our August report, the statewide inventory is down about 50% from 2019.”

What drives home prices?

There are certainly ways in which traditional inflation affects housing prices. Like nearly every other commodity, the price of raw materials — including lumber and other house-building essentials — has gone up since the pandemic.

“I was at a roundtable recently in Altoona with some key players in the real estate industry, and the figure that really stood out was that before you even put a post in the ground, it can cost upwards of $100,000 for a developer between municipal and other requirements before you can start building,” said David Dean, first vice president at the Pennsylvania Association of Realtors. “That has a great bearing on the higher price of building a home, and you see that carried over to the homebuyer. We’ve seen both material costs and regulations that have increased how expensive housing has become.”

The association’s August 2024 report, which draws on data supplied by 18 Realtor associations across the state, notes that home sales in Pennsylvania have decreased from about 15,900 per month in August 2021 to just over 11,500 per month as of this summer.

During that same period, the median sales price of a Pennsylvania home went from $260,000 to $305,000, a 17% increase.

“There is a lack of affordable inventory out there,” Dean said. “There seems to be a higher concentration of higher-cost housing, and it’s so expensive to build now — the ability to build the way you could a decade ago is slowly drying up.”

Interest rates

One area of the national economy inextricably linked to inflation is the interest rate set by the U.S. Federal Reserve, or the Fed.

In recent years, the Fed has raised interest rates in an effort to cool down inflation. And while national statistics show that move has been somewhat effective, it didn’t do any favors for the real estate market.

“When those rates went up to 7% or 8% between 2020 and 2022, you saw a lot of first-time homebuyers deterred as well as people who may want a new house,” said Logan Swan, a senior loan officer with Federated Mortgage Corp. in Pittsburgh. Swan, who lives in North Huntingdon, does most of his real estate business in the Greensburg area.

Inflation at the grocery store — or in other areas of the economy — may not affect the real estate market directly, but it matters, Swan said.

“Less money in people’s pockets means less available for a down payment or closing costs on a home,” he said. “And when you have a lot of people sitting on older interest rates between 2% and 4% — which we’re not likely to see again — they’re understandably hesitant to take on a mortgage that could be 4% to 5% higher.”

Matt Mergo, owner and mortgage broker at Forest Hills Mortgage, said the biggest factor for brokers is always the interest rate.

“As the Fed increased rates in response to inflation, that can really hurt people’s purchasing power,” Mergo said. “In 2022 and 2023, my loan activity fell accordingly. But it does seem that entering 2024, we’ve reached a kind of new level of ‘normal.’ ”

Mergo said, as a whole, the country simply has far more households than available housing stock.

“Regardless of what rates are doing, that’s going to put pressure on home prices,” he said.

Location matters as well.

“In Greensburg, for the most part, when someone wants a house, they can find one,” Swan said. “I work out of Pittsburgh as well, though, and it’s a lot more competitive. If there’s a house near Pittsburgh that’s priced right, you might still be competing with 15 or 20 other buyers and driving the price up. Out toward Greensburg, you’re competing with maybe three or five buyers instead.”

Swan said waiting for rates to continue dropping may not be the answer.

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“A lot of people — first-time buyers, second-time buyers, people who want to downsize — are waiting to see if these rates will drop and they can save some money. But when they do drop, demand will go through the roof, which leads to more competition. A lot of those people probably won’t save the money they think they will.”

Swan said one thing his company has taken advantage of is the Pennsylvania Finance Agency, which offers qualified homebuyers 5% toward their closing costs in the form of a 10-year forgivable loan.

“We’ve piggybacked off that loan a lot over the past two years,” he said. “People are strapped for cash, and that extra cushion really helps — and sometimes the rate for that loan runs as low as 3%.”

Swan said homebuyers should explore all the options available to them.

“I’d rather take my chances in the market now, rather than wait for the rates to come down,” he said.

Shelter inflation

U.S. Treasury Secretary Janet Yellen recently referred to shelter inflation as the “last leg” of getting the recent bout of national inflation under control.

According to Rob Dietz, chief economist for the National Association of Home Builders, shelter inflation is the component of the Consumer Price Index that weighs the amount paid by renters each month, lodging costs at hotels and something called homeowner equivalent rent, which is a proxy for the estimated cost of owning a home.

“Shelter inflation has been something like 70% of the overall growth in CPI,” Dietz said. “It’s really been the key driver.”

Dietz’s estimation for the U.S. housing deficit was quite a bit smaller than Shindle’s — he put it at 1.5 million rather than 5 million, laying the blame on what he called a lack of “five Ls:”

• Lack of lumber: “There’s a 15% effective tariff rate on Canadian lumber, which makes up a third of what we use in the U.S. Tariffs are inflationary,” he said.

• Lack of lending for acquisition development construction financing, the land development loans that fund improvements necessary to convert raw land into construction-ready building sites.

• Lack of skilled labor in the employment market.

• Lack of available lots.

• Legal and regulatory hurdles: Dietz agreed with Dean’s estimate that it can cost a developer $100,000 in permit fees, impact fees and other associated regulatory costs to put a shovel in the ground.

“It represents about 24% of the cost of price for a single-family home,” he said.

Starting shortly before 2013, he said, the housing market was hit with a perfect storm of issues.

“You had supply-side constraints, a housing glut that lasted until about 2014, multidecade lows in single-family home building, and the result was a deficit that will probably take 1.5 million homes to resolve.”

Dietz believes there is one way to tame shelter inflation.

“It’s to build more attainable, more affordable housing,” he said.

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