Housing Will Get More Expensive Because of the Fed

It may seem counterintuitive to suggest that today’s high interest rates will fuel shelter inflation down the road. After all, the Federal Reserve has tightened monetary policy to stamp out price pressures in the economy.

When it comes to housing though, building more is the only way to structurally address the primary driver of elevated shelter costs, and that’s going to take lower interest rates, not higher-for-longer borrowing costs.

If there was ever a time to demonstrate that more construction is a surefire way to limit increases in home prices and rent, now would be it. Coming out of the pandemic-induced recession, 2021 and the first half of 2022 offered a generational opportunity to build given where interest rates, rent growth and asset valuations were. Some metros saw a surge of new projects and now have very little housing inflation, while others missed their chance and continue to see upward pressure on home prices and rents.

In the apartment market, both government and private sector data show that rents are stable or falling in the southern and western markets where supply growth has been the most robust over the past few years. In the northeast and mid-west, where construction activity was more muted, rent growth has been the strongest.

In the single-family rental market, the fastest rent growth is currently in mid-sized undersupplied metros in the southeast such as Chattanooga and Knoxville in Tennessee, and Savannah, Georgia, according to John Burns Research & Consulting. Larger Sun Belt metros that built a lot more housing including Austin, Phoenix and Las Vegas have essentially no rental inflation at the moment.