Inflation Heats Up in January

[Luis Fajardo]

January’s inflation report showed higher-than-expected price increases, raising questions about the Federal Reserve’s next moves and the overall direction of the economy. Consumer prices rose 0.5% for the month, surpassing the 0.3% forecast, while year-over-year inflation increased to 3.0%, up from 2.9% in December. While this suggests that inflation is proving stickier than anticipated, it remains well below the peaks seen in 2022 and 2023. Economic progress is rarely a straight line, and the key takeaway is that while inflation is still present, it is not accelerating out of control.

Much of the increase in prices can be attributed to factors that often occur at the start of the year. Many businesses adjust their pricing strategies in January, which historically leads to a temporary bump in inflation. In addition, trade policies have introduced new cost pressures, with a 10% tariff on Chinese imports raising prices on certain goods, though tariffs on Canadian and Mexican imports remain suspended until March. Housing costs continue to be a major contributor to inflation, with shelter prices rising 0.6% in January, keeping pressure on affordability.

Despite these inflationary trends, the Federal Reserve is not raising rates and is keeping its benchmark interest rate steady at 4.25% to 4.50%. While markets had anticipated the first rate cuts as early as March or May, those expectations have now shifted to June or September. However, even with this delay, there is no indication that rates will be increased further, which provides some stability for investors, homebuyers, and business owners looking ahead.

What This Means for the Housing Market

Higher interest rates have undoubtedly slowed the housing market over the past year, but demand for real estate remains strong, particularly in growing metropolitan areas. The biggest challenge continues to be affordability, as mortgage rates remain high and inventory remains tight in many regions.

The 10-year Treasury yield has risen to 4.64%, which has kept mortgage rates elevated, currently hovering in the 6.5% to 7% range. This has made financing more expensive for buyers, but it has also led to less competition in the market, creating opportunities for those who are financially prepared.

One of the biggest factors to watch in 2025 is new housing supply. Over the past few years, homebuilders have ramped up construction in response to demand, and a wave of new housing is expected to hit the market later this year. This could help stabilize home prices and create buying opportunities for investors and first-time homebuyers. However, given that many sellers have locked in ultra-low mortgage rates from 2020–2021, the existing home supply remains constrained, which will continue to support home prices in certain areas.

For investors, rental properties remain a strong option in an inflationary environment. Rental demand is still growing, and with homeownership affordability being a challenge for many, the rental market is likely to stay strong throughout the year. If rates decline later in 2025, refinancing opportunities could further improve returns on investment properties.

Guidance for Investors

For investors, 2025 is shaping up to be a strong year for rental property acquisitions. Demand for rentals remains strong in high-growth markets, particularly in states like Florida, Texas, and the Carolinas, where population growth is outpacing housing supply. With fewer buyers in the market due to high rates, investors who move now have leverage to negotiate on purchase price, seller credits, and even off-market deals.

The biggest mistake investors can make right now is waiting for perfect conditions. By the time the Fed cuts rates, many of the best deals will be gone. The best strategy is to focus on properties that cash flow at today’s rates and consider a refinance down the line as a bonus rather than a necessity. Additionally, investors should monitor local markets carefully—new supply is coming online, particularly in the multifamily space. This could create opportunities to acquire discounted properties in areas where developers overbuilt and need to sell.

Inflation may not be cooling as fast as expected, but it is trending in the right direction. The Fed is holding rates steady for now, but when cuts begin, real estate activity is likely to pick up quickly. Buyers and investors who position themselves early will have the advantage over those waiting on the sidelines.

For those looking to secure financing or explore investment opportunities, now is the time to build relationships, line up funding sources, and identify target properties before competition increases