Housing affordability has improved, but not nearly enough to offset a weaker labor market and a more complicated inflation picture.
(The Center Square) – This week’s economic calendar includes several important housing reports, including existing home sales, housing starts, and building permits. But the most consequential releases are likely to be the first reading on February consumer inflation and the delayed January report on personal consumption expenditures, or PCE, the Federal Reserve’s preferred inflation measure. Together, they will help answer the central economic question of the moment: can the Fed respond to a weakening labor market, or will inflation remain high enough to keep policymakers cautious?
Last week’s jobs report made that question more urgent. The labor market is no longer simply cooling from an unsustainably strong pace. It now looks close to stalled. Payroll employment fell in February, prior months were revised lower, and hiring remains concentrated in a narrow set of industries. Even accounting for temporary factors, labor demand has clearly lost momentum. That matters because housing depends on more than interest rates. Mortgage rates influence affordability, but home sales also depend heavily on confidence. Households are more likely to buy, sell, or move when they feel secure in their jobs and incomes. When hiring slows and uncertainty rises, many of those decisions are delayed. A softer labor market can weigh on housing activity even when borrowing costs improve.
The housing reports out this week should also be read in light of January’s severe winter weather. February existing home sales mostly reflect purchase contracts signed in January, when large parts of the country were disrupted by a major freeze. That is one reason a weak sales number would not be surprising. Still, the January data suggest the market was slowed by weather, not stopped by it. Zillow’s January market report showed that 195,335 homes went pending, 1.8 percent more than a year earlier. That is a useful reminder that buyer demand did not vanish. It remained present even in a month shaped by bad weather, affordability challenges, and broader economic caution.
There is a second important housing story beneath the surface. Affordability has improved over the past year. Zillow reported that the typical monthly mortgage payment on a U.S. home in January was 8.4 percent lower than a year earlier, and a separate Zillow analysis found that a median-income household could afford a home priced about $30,000 higher than it could a year ago, the strongest buying power since March 2022. But that does not mean affordability has returned to normal. Even after that improvement, buyers still have far less purchasing power than they did before the pandemic housing boom and mortgage-rate shock. In practical terms, conditions are less punishing than they were a year ago, but they remain much tougher than households grew used to before 2020.
Inventory has also been improving, and that is gradually changing the balance of power in the market. Inventory is shifting bargaining power toward buyers, which should support buyer entry at the margin but keep price growth and turnover in check.
That same logic helps explain why homebuilding is expected to remain subdued. Builder sentiment is still weak despite some recent improvement in mortgage rates. The National Association of Home Builders’ confidence index fell again in February, reflecting persistent affordability problems, soft buyer traffic, and continued cost pressure. Builders are not operating in a market defined by excess demand anymore. They are operating in one where resale inventory is slowly improving, buyers are more price sensitive, and financing conditions remain restrictive by the standards of the past decade. That is an environment more consistent with flat-to-weaker permits and starts than with a meaningful construction rebound.
But the most important releases this week are still on inflation.
The last consumer price index report, covering January, was encouraging but not decisive. Headline inflation rose 0.2 percent over the month and 2.4 percent from a year earlier. Core inflation, which excludes food and energy and is often watched more closely for underlying trends, rose 0.3 percent over the month and 2.5 percent from a year earlier. That was progress. It suggested inflation was still moving lower. But it did not settle the matter, especially since some service categories remained firm and policymakers have repeatedly said they want greater confidence that inflation is returning sustainably to their 2 percent target.
The delayed January PCE report adds another important piece. In the previous release, which covered December, headline PCE rose 0.4 percent over the month and 2.9 percent from a year earlier. Core PCE also increased 0.4 percent on the month and 3.0 percent from a year earlier. Those are not the numbers of an economy that has fully finished the inflation fight. Rather, they suggest that price pressures ended 2025 on a firmer note than the Fed would have preferred.
That leaves the Fed facing a difficult tradeoff. Under ordinary circumstances, a weaker labor market would strengthen the case for lower interest rates. The Fed itself indicated in December that downside risks to employment had increased even as inflation remained somewhat elevated. But the inflation picture has become harder to interpret. The February CPI and January PCE reports largely reflect conditions before the recent conflict with Iran pushed oil prices sharply higher. That means even a decent inflation report may not fully reassure markets or policymakers if they believe energy costs will soon begin feeding through to broader prices.
This is why the week ahead matters so much. Housing data may show temporary weakness related to weather. Construction data are likely to reflect continued caution among builders. But the inflation reports will do the most to shape expectations for monetary policy. If inflation continues to cool, the case for easier policy later this year becomes stronger, especially given the softer labor market. If inflation remains sticky, the Fed may have less room to respond, even as economic momentum fades.
The real test this week, then, is not whether one housing report comes in a little soft because of snow and ice. It is whether inflation had continued to ease substantially ahead of the Iran war. If it had, the Fed could take some comfort that the underlying trend was moving in the right direction before the oil shock hit. If it had not, policymakers may have to confront a more uncomfortable mix of slower growth, weaker hiring, and renewed inflation pressure. That would matter well beyond financial markets. For households, higher energy prices reduce spending power. For businesses, they raise costs and create new uncertainty. And for the Fed, they narrow the room to respond to a cooling labor market. In that sense, this week’s inflation data are not just another monthly update. They are the last clear readings on the economy before the oil shock began to reshape the outlook.
By Orphe Divounguy | The Center Square contributor, an economist with Zillow and the co-host of The Center Square’s Everyday Economics podcast.
