Renters and Homebuyers Are Suffering From the Fed’s War on Inflation

At the beginning of the pandemic, Arin Lopez, 47, and Derek Swenson, 35, started thinking about buying a home to get their family out of the two-bedroom apartment they’ve long rented in central Phoenix. But every home they liked had multiple offers over asking price within a day or two of going on the market. So they kept renting, even though their two sons, both under 10 years old, had to share a bedroom.

Now, the couple are kicking themselves for not buying earlier this year, even when mortgage rates were a little above 3%. At the time, the $550,000 homes they were considering would have meant a $2,200 monthly mortgage payment with a traditional 30-year fixed mortgage (with a down payment of about $110,000). Today, in the wake of a series of jumbo rate raises by the Federal Reserve, lenders are quoting them an interest rate of 7.25%, which means that their monthly payments would be around $3,800 a month for a $550,000 house. And since home prices have remained stubbornly high, they’re starting to realize they might have to pay even more to get the space they want.

“It doesn’t seem like this is the American Dream to be this stressed,” says Lopez. The family’s rent, if they stay in their two-bedroom Phoenix apartment, will go up 30% if they decide to renew it in January, to around $2,700. “I’m frustrated with interest rates and I’m frustrated with home prices.”

One of the biggest ironies of the peculiar economy created by the pandemic is that the rising cost of housing is driving much of the inflation in the economy, but the only workable cure for that inflation—increasing interest rates—then drives the cost of housing even higher.

In short, many of America’s 114 million renters are stuck in a vicious cycle. The pandemic created a huge demand for more housing as families needed more space to conduct work and school from home, and as one-time roommates moved away from crowded cities and into their own places. But that demand sent rents soaring. And soaring rents contribute to rising inflation, which in turn has motivated the U.S. Federal Reserve to raise interest rates, thereby influencing mortgage rates. And as mortgage rates rise, a growing number of renters can’t afford to buy homes, which then makes renting more competitive and pushes prices up.

Nationally, the average rent on a two-bedroom apartment in October was $1,832, up 9.2% from a year ago, a move that followed 12 straight months of double-digit jumps, according to Zumper, an online rental listing platform. And the typical mortgage payment for someone buying a home today is $1,910, up 77% from a year ago, according to Zillow. (This assumes a 20% down payment and a 30-year fixed mortgage at the prevailing rate.)

“It’s a perverse consequence of the fight against inflation,” says Jeff Tucker, a senior economist at Zillow. “The Fed swung to tighter monetary policy, and that policy shift really tipped the cost comparison for people choosing whether to rent or buy.”

The government’s latest inflation figures, released Nov. 11, show this cycle continuing. Inflation was up 7.7% in November over the previous year, and shelter—or housing—contributed to more than half of the rising prices over the previous month. In November, the cost of shelter, which counts rents as well as how much monthly rent homeowners think they could get for their house, was up 6.9% from a year ago, and 0.8% from October.

Inflation happens when too much demand is chasing too few goods in the economy. There are ways to fight inflation other than raising interest rates, but none of them are particularly workable in an election year and with the lingering supply chain snafus of the pandemic. The government could raise taxes to dampen demand, but such a move would be unpopular with voters. Officials could also incentivize companies to add more supply to the economy—build more houses or drill for more oil, for instance—but those supplies can take awhile to come online.

That’s why this dynamic, of inflation’s cure being particularly painful for so many Americans, is unique for this moment, says Tucker. In each month in 2022, inflation has been up 7% or more compared with the previous year, a rate not seen since the early 1980s. Then, as now, the Federal Reserve speedily raised interest rates in an effort to slow demand, causing the cost of borrowing money to rise.

But today, home prices are so high relative to incomes that when mortgage rates rise so much, homeownership becomes unattainable for many Americans. (You can explain this to the Boomers who say they paid interest rates in the double digits when they first got a mortgage. Yes, interest rates were higher then, but homes were less expensive, compared to Americans’ salaries.) By one analysis, average home values have grown 118% since 1965, while median household income has just increased 15%, even adjusting for inflation. Also on Nov. 10, the National Association of Realtors (NAR) said that home prices rose in 98% of metro areas in the third quarter of the year, when compared to the same period last year. The median price of a single-family existing home climbed 8.6% to $398,500, the NAR said.

In some parts of the country, says Tucker, homes “were really only feasible for a lot of people to buy with the help of super low mortgage rates. Now that’s gone. The shock of the cost of a mortgage payment is a lot more likely to stop people from buying altogether.”

This cycle has already bumped tens of thousands of people out of buying a home–and altered the race and income mix of first-time buyers. Those homebuyers made up just 26% of buyers in the year between July 2021 and June 2022, down from 34% the previous year and 50% in 2010, according to a recent survey released by the NAR. That’s the lowest level since the NAR started tracking in 1981.

Inflation may be starting to slow—the 7.7% growth is the smallest year-over-year increase since January— but that won’t be much relief to people like Lopez and Swenson, who are realizing that they may have to cut back on important things, like travel to visit their families, if they want to buy a home.

But interest rates aren’t likely to budge anytime soon. Most analysts expect the Fed to raise interest rates again in its final meeting of the year in mid-December. Apartment rents may start to moderate by then, but for a reason that may particularly irk buyers like Lopez and Swenson: Developers, buoyed by the low interest rates of the past few years, invested in building apartment buildings and now, as those apartment buildings come online, they’ll have no compunction about increasing rents for all those people priced out of the homebuying market, says John Burns, the CEO of John Burns Real Estate Consulting. The reason? Developers saw apartments as a hedge against inflation, knowing, he says, that they’d always be able to raise rents if prices in the economy kept going up.

If developers benefited from the low interest rates of the past, and from the costs that are driving first-time buyers out of the home-buying market today, Lopez and Swenson are on the opposite side of that equation. “I just feel,” Lopez says “that we’re the victims of really bad timing.”