Relief Eludes Many Renters as Fed Raises Interest Rates

Rents have been rising swiftly across America for much of the pandemic era, and housing experts are warning that they could now receive a boost from an unlikely source: the Federal Reserve.

As the central bank raises interest rates to cool down the economy and contain rapid inflation, it is also pushing up mortgage costs, putting home purchases out of reach for many first-time buyers. If people who would have otherwise bought a home remain waylaid in apartments and rented houses, it could compound already-booming demand — keeping pressure on rental prices.

While it is tough to predict how big or how lasting that Fed-induced bump in rental demand might prove, it could ironically make it more difficult for the central bank to wrestle inflation lower in the near term. Rent-related costs make up nearly a third of the closely tracked Consumer Price Index inflation measure, so anything that helps to keep them climbing at an unusually brisk pace is likely to perpetuate rapid inflation.

Rents on new leases climbed by 14.1 percent in the year through June, according to Apartment List, an apartment listing service. While that is slightly less than the 17.5 percent increase over the course of 2021, it is still an unusually rapid pace of growth. Before the pandemic, a 2 to 3 percent pace of annual increase was normal. The recent quick market rent increases have been slowly spilling over to official inflation data, which track both new and existing leases.

“A lot of folks are seeing now as they go to re-sign their lease that it’s hundreds more dollars than last month, thousands more dollars than last month,” said Nicole Bachaud, an economist at the housing website Zillow, whose own rent tracker is running fast. “We’re going to continue to see pressure in rent prices; to what extent is to be seen.”

Gail Linsenbard lectures on philosophy at a college in Boulder, Colo., but housing in the area has gotten so pricey that she has been teaching remotely — recently from a friend’s house in Cincinnati, now from a friend’s place in New York — to make ends meet.

“The rents in Boulder have just skyrocketed, so I could no longer afford to live there,” said Dr. Linsenbard, a 62-year-old ethicist, who said that the $36,000 she earns lecturing four classes per semester had always been tight, but was increasingly failing to keep up with inflation. While she can rely on a national network of friends, the situation has disrupted her life.

“I’d so prefer my own place,” she said.

Besides burdening millions of families across America, rising rents have emerged as a particularly thorny issue for the Fed. While coronavirus-related supply disruptions have fueled price increases in products like cars and couches, the recent surge in rents relates to longer-running fundamentals. America has for years failed to build enough housing, and as members of the massive millennial generation grow older and move away from their parents and roommates, the need for apartments and leased homes has grown.

The pandemic took that demographic trend and sped it up. After being cooped up during quarantines, people looked for their own places — and apartment construction could not keep pace.

Builders were completing units at an unusually rapid 349,000-per-year rate in early 2022, about 1.2 times the prepandemic pace, based on estimates in a report from the Joint Center for Housing Studies at Harvard. But the number of occupied apartments was rising more than twice as quickly.

America’s rental vacancy rate slumped as apartment supply struggled to keep pace with soaring demand, and was lingering at levels last seen in the 1980s through the start of 2022.

The resulting run-up in market rents, which began in earnest last summer, has slowly trickled into official inflation data as people renew their leases. A category in the Consumer Price Index that measures rent of primary residence surged by 5.2 percent in the year through May, and fresh data will be released this week.

Because a large number of new apartments and condominiums have been started since the pandemic began, few if any economists expect the recent breakneck pace of rent increases to continue: More supply should be on its way. Some markets, like Phoenix, have already seen a slowdown in real-time rent trackers.

But new buildings are taking a long time to finish amid shortages of both the labor and supplies needed to turn blueprints into reality, and it is uncertain when those challenges will clear up. Plus, new apartment and housing developments skew toward high-end and luxury units at a moment when the nation is short about 1.5 million housing units that are affordable and available to lower-income renters, according to a Harvard housing study.

In short, it is not clear how well the coming supply will match the areas of booming demand.

As people compete for a still-constrained number of apartments, it is unlikely that rental prices will fall from the elevated levels they have reached in the past year, experts said — they will probably just climb more slowly than they are now. And as labor and utility costs for landlords rise, they could even continue rising faster than normal.

“We’ll probably see rent growth moderate to some degree,” said Jay Parsons, head of economics at RealPage. But he noted that costs are going up for landlords and demand remains solid, adding that “I don’t think it will moderate as much as people want to see.”

And the Fed’s rate increases will only complicate the situation.

As rates rise, more “people will have to renew their lease — maybe they thought they had enough money for a down payment,” said Lawrence Yun, chief economist at the National Association of Realtors. “Rental demand will be rising.”

That potential bump will likely fade with time, housing experts said. If the economy slows sharply, as many economists expect given the Fed’s efforts, rents are likely to follow, as people move back in with roommates or family members and rental demand takes a hit.

“The main thing that would cool down the rental market is a slowing of wage growth,” said Igor Popov, chief economist at Apartment List. “A lot of the lifestyle gains that came with more and better housing are probably going to reverse a bit.”

But the transition could take time to play out. Households might use savings to try to sustain their living situations for a while, and for now, wage growth has remained strong before accounting for inflation.

In the meantime, an already limited supply of rental housing could be curtailed in the months and years ahead as the Fed’s rate moves push up financing costs and deter developers. The central bank began raising interest rates from near zero in March and expects to lift them to nearly 3.5 percent by the end of the year.

Already, new home construction has dropped sharply as borrowing costs climb, declining 14.4 percent in May to the lowest rate in more than a year. Early data suggest that apartment construction is also taking a hit — something industry executives can attest to.

David Wali, who runs the Boise office of the Gardner Company, a developer of residential and commercial properties throughout the mountain West, said the question of whether to build has been clouded by inflation, rising interest rates, and the continued disruption of supply chains, which has builders worried they might finish projects, be ready to rent out the units, “and be left with no appliances.”

Those risks have in turn caused lenders to turn more conservative by requiring developers to put more of their own money into projects, further crimping development.

Mr. Wali has already started delaying projects, including 500 apartments in the Boise area, and he said that as the lack of new development works its way through the system in the coming months, supply will be even more squeezed. The flip side — good for him, bad for renters — is that rising rental demand has him feeling good about rent levels on apartments his company already owns.

“Those are fantastic,” he said.

The nation may be seeing a geographic shift in which rental markets are hot. Early in the pandemic, as remote work gave people geographic flexibility, places like Orlando and Tampa, Fla., and Rochester, N.Y., experienced pronounced rent growth. Now, some cities in the middle of the country are cooling, even as offices recall workers and coastal markets like New York City heat up.

“I’ve been practicing for 42 years, and I’ve never seen the huge, across-the-board demand for rent increases that I’m seeing now,” said Samuel Himmelstein, a tenants’ rights lawyer in New York City who said that clients were regularly getting in touch with him now to see if there is anything they can do about landlord demands for 20 to 30 percent higher rent.

National housing policy could help with the rental crunch over the long run. The Biden administration has proposed a series of measures meant to foster more affordable housing construction, though housing groups have argued that additional congressional action is likely needed to fully address the shortage of affordable units across owned and rented housing.

For now, the housing market is bifurcating, with the market for purchased homes slowing even as the rental market remains hot — a trend Eric Parks has witnessed. The online college professor listed a duplex in South Lake Tahoe, Calif., in May for $899,000, a price at the bottom range of its online valuation, but elicited no interest. He cut the price, but received only offers that he found unacceptably low.

So he decided to instead rent the Reno, Nev., condominium he had been living in for $1,500 to a traveling nurse, who was one of 18 applicants, while moving back to the duplex and listing its neighboring unit for $2,500. It worked.

“I would never have thought the listing would result in no offers,” he said. “But the rental market is nuts.”