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Rising interest rates could create more local rental market competition

092722_For rent sign by apartments_by Jacob Munoz
A "for rent" sign at a Highlands-Douglass apartment building.

Renting in Louisville could become more competitive and expensive due to federal monetary policy, according to a local economics expert.

The Federal Reserve System, the country’s central bank, is trying to combat inflation by raising interest rates. Last week the agency increased the federal funds rate, which trickles down to other rates, by 0.75 percentage points as part of its fastest rate hike in decades.

Americans this year have felt the sting of rising inflation even in a hot labor market. Though unemployment rates are at their lowest levels since the COVID-19 pandemic started, increased spending has helped cause consumer price growth to outpace wage gains.

The central bank’s actions to curb spending are making some economists fearful of a possible recession, and the interest rate hike may impact home ownership, too. As borrowing becomes more expensive, the most popular mortgage, a 30-year fixed-rate loan, has reached its highest interest rate since 2008. Soaring rates paired with elevated home prices could dissuade potential buyers.

Weihua Zhao, an associate economics professor at the University of Louisville, said expensive mortgages could push more residents into the rental market, which could lead to an imbalance in demand and supply.

“If demand goes up, while in the short term the supply of the rental market doesn't change, we will expect the increase in rental [prices]... The rental market could, you know, slowly become unaffordable for people who have a lower income,” Zhao said.

A recent housing needs report by the advocacy group Up for Growth found that the Louisville area went from a slight housing unit surplus to a small shortage from 2012 to 2019. The region was about 3,000 units behind in production, putting it at the middle of the pack among more than 300 U.S. cities examined in the report.

However, a 2019 housing assessment commissioned by Louisville Metro found a more significant disparity in the availability of affordable homes. The analysis found that more than 30,000 homes needed to be created for households making less than or 30% of the area median income, which is about $23,000 a year for a household of four.

Zhao said that if prospective renters have trouble paying for units, such as in a recession, the rental market could be disproportionately impacted. It could drive interest in lower-end apartments overall, as home-seekers aim to avoid the expense of higher-end rentals.

“We all need housing. So if buying a home is unaffordable, the demand for the rental market will just increase,” she said.

Rents are already high nationally. A June report by home brokerage Redfin found median rent in the United States was up 15% from a year ago.

According to data collected by the Pew Research Center, rent has also outpaced inflation over the past five years. The nonpartisan think tank also found that the rate of available rental units fell by nearly half from 2010 to 2021.

In Louisville, homeownership rates vary along demographic lines. According to the most recent annual report by the Metropolitan Housing Coalition, a local advocacy and research group, homeownership in the Louisville region is higher than the national rate. But Black and Hispanic/Latino residents are less likely to own their homes in Louisville than their racial and ethnic counterparts elsewhere. They’re also more likely to be denied mortgages compared to white Louisvillians.

Tony Curtis, the group’s executive director, said higher mortgage rates create affordability problems across the housing market.

“Once mortgage rates go up, not only are we already seeing a great disparity in who's able to originate and succeed at getting a mortgage for a house, but that has the opposite effect too, because then everybody's more reliant on rental properties.”

“The property owners who own these developments are going to see that as an opportunity to raise rent,” he said.

Curtis said potential solutions to address high prices are rent control measures and rent gouging protections, such as a proposed bill by Democratic State Rep. Attica Scott of Louisville to provide private rent control in west Louisville neighborhoods. State law currently prohibits local municipalities from imposing such rent control.

Jacob is LPM's Business and Development Reporter. Email Jacob at jmunoz@lpm.org.