Why higher interest rates pushed up rent

Eyes and ears will be turned to Jackson Hole on Friday and Fed Chair Jay Powell's speech there, as investors search desperately for any tiny tidbits hinting at whether and when the Federal Reserve will start cutting interest rates again.

The Fed is balancing inflation risk, especially from tariffs, versus unemployment risk from high rates and a slowing economy.

One confounding part of the inflation picture? Rent.

When prices started shooting up in the pandemic, rents followed suit, peaking at nearly 9% inflation year-over-year. Rent increases have moderated since then, but less than prices overall.

Higher interest rates should have suppressed demand for goods and services, keeping a lid on rent increases.

Columbia Business School finance professor Boaz Abramson went looking for a reason rent inflation was so stubbornly high, and here's what he found: "Higher interest rates get reflected in higher mortgage costs, and that prevents people from becoming homeowners."

Those folks stay in rental housing, competing with other renters.

"Low-income households, they are impacted by the fact that first-time buyers remain in the rental market and overall increase demand," Abramson said.

Bottom line: Higher interest rates pushed rents higher.

But now, "interest rates have dropped a bit," Abramson said. "And we do see that rent inflation has somewhat dropped."

Online housing site Zumper tracks rents currently being asked in the market. As of July, its national rental index showed that, year-over-year "both one- and two-bed rents were down, the first time since February 2016 that we've been flat or declining across the board," said Tanguy Le Louarn, chief product officer.

And, he said, the fall in average nationwide rents accelerated this month.