Inflation has cooled across much of the economy. Energy prices have moderated, supply-chain pressures have eased, and consumer-goods inflation has slowed from its post-pandemic peak. Yet one category continues to stand apart: housing. Despite sharply higher interest rates and stretched affordability, home prices remain elevated in many markets, prompting a growing question among economists, investors, and buyers alike. Are home prices the last major inflation holdout?
Why Higher Rates Haven’t Brought Prices Down
In a typical cycle, higher borrowing costs reduce demand and force prices lower. Mortgage rates have more than doubled from their pandemic lows, and affordability metrics are near multi-decade extremes. Under normal circumstances, that combination would produce a meaningful price correction.
Instead, national home prices have largely stabilized or continued to rise modestly, depending on the region. The missing ingredient in the correction narrative is supply. Homeowners who refinanced or purchased homes when rates were historically low now face a financial penalty for selling. Trading a 3% mortgage for a loan closer to 7% can dramatically increase monthly payments—even if the home price remains unchanged.
John Donikian, Vice President at Best Interest Financial, says this dynamic has fundamentally altered the housing market.
“Housing inflation hasn’t cooled because homeowners aren’t behaving like sellers in a normal cycle,” Donikian explains. “Millions of households are effectively anchored by low-rate mortgages, which keeps supply tight even as demand softens. That imbalance props up prices in a way we don’t see in other inflation-sensitive categories.”
This “lock-in effect” has restricted inventory nationwide, preventing the supply surge that typically drives prices lower during periods of tightening.
Housing’s Structural Supply Problem
Beyond interest rates, housing faces long-standing structural challenges. New construction has failed to keep pace with population growth for more than a decade. Zoning restrictions, high land costs, labor shortages, and rising material prices have made building new homes both slow and expensive.
As a result, even a slowdown in buyer demand does not translate easily into lower prices. When replacement costs remain high, existing homes retain value. In many markets, the cost to build a comparable home exceeds the price of buying one, creating a natural price floor.
This supply constraint also explains why price declines have been uneven. Markets with strong job growth, limited land availability, or regulatory barriers continue to see upward pressure, while overheated pandemic boomtowns experience only modest pullbacks.
Demographics Are Still Supporting Demand
Demand has softened, but it hasn’t disappeared. Millennials, the largest generation in the workforce—are now in their peak home-buying years. Many delayed purchases during the pandemic or were priced out as rates rose, but household formation continues.
Rather than exiting the market entirely, buyers are adjusting expectations. Smaller homes, longer commutes, multi-generational living arrangements, and dual-income strategies have become more common. These adaptations help sustain demand even in a high-rate environment.
Investor activity has slowed compared to recent years, but long-term rental demand remains strong in many metros. That stability reduces forced selling and keeps downward pressure on prices limited.
Housing Inflation Moves on a Different Timeline
Unlike goods or services, housing inflation tends to lag broader economic trends. Costs embedded in home prices, land acquisition, permitting delays, labor expenses, and construction materials accumulate over years, not months.
Damian P, Owner of Polar Trends, says this lag is often misunderstood.
“Home prices aren’t ignoring inflation, they’re reflecting it with a delay,” Damian notes. “Housing absorbs years of cost pressures, from land prices to labor shortages. Even if headline inflation falls, those embedded costs don’t unwind quickly, which keeps prices elevated longer than people expect.”
This helps explain why shelter inflation remains stubborn even as other components cool. Housing is less responsive to short-term policy shifts and more influenced by structural constraints.
What Would Actually Push Prices Lower?
A meaningful decline in home prices would likely require a sharp deterioration in labor markets. Job losses, income shocks, or widespread forced selling could loosen supply enough to overwhelm demand. So far, employment conditions have remained relatively resilient, limiting distress sales.
Absent a severe recession, many analysts now expect a prolonged period of stagnation rather than a crash. Nominal prices may remain flat while inflation gradually erodes real home values over time. In practical terms, housing could “cool” without producing headline-grabbing price drops.
This scenario would still represent a reset for buyers and investors, just one that unfolds slowly instead of suddenly.
Implications for Buyers, Investors, and Policymakers
For buyers, waiting for a dramatic price collapse may prove unrealistic. The more relevant risk is purchasing at high prices with high borrowing costs, which can strain cash flow even if home values hold steady. Affordability, not price direction alone, is the key variable.
For investors, housing may offer lower returns than in the previous decade, with income and cash flow replacing appreciation as the primary drivers of value.
For policymakers, housing presents a challenge. Interest-rate policy can cool demand but often worsens supply shortages. Without structural reforms such as zoning changes, faster permitting, and incentives for construction, housing inflation may remain the final stubborn component of a cooling inflation landscape.
The Bottom Line
Are home prices the last inflation holdout? In many respects, yes. Not because housing is immune to economic forces, but because it operates on a slower, more structural timeline. As inflation fades elsewhere, housing remains a lingering reminder of the cost pressures built up over years ones that won’t disappear overnight.
