Even with gas prices declining and signs of some inflation cooling, the Federal Reserve’s action on interest rates has sparked a torrent of stories about the Fed’s impact on the homeownership market. How it’s keeping folks who want to buy in their rental homes, thus driving up rental prices and adding to the nation’s ongoing housing affordability crisis.

Were it so simple.

Priscilla Almodovar
Priscilla Almodovar

In fact, the fixation on interest rates is a distraction when it comes to the rental market—or at least an oversimplification. And unless we correct the record and understand that would-be homeowners sitting on their hands isn’t the sole driver of skyrocketing rents, we’ll continue grasping for the policy and investment solutions that are sitting right in front of us—and failing to provide millions of American families a safe, decent, affordable home.

First, let’s disabuse ourselves of the theory that higher interest rates are the main driver of higher rents. Conventional wisdom says that rising interest rates raise mortgage costs and, in turn, cause a potential homeowner—emphasis on potential—to opt out of buying a home, keeping rental demand high and putting upward pressure on rents. Lower supply and higher demand yields increased rents.

Except the picture is vastly more complicated than that.

Yes, rents have been climbing, but rents were trending upward well before and well after the Fed got involved (with a brief reprieve in the deepest throes of the pandemic). What’s more, homeownership rates have remained almost the same since the 1960s despite billions in subsidies during that period to push that number higher. Sure, there may be fewer people moving from rentership to ownership, but that hypothetical figure is piddling compared with the catastrophic shortage of affordable rentals.

...We need to encourage pension funds, life insurance companies, and other investors to view affordable housing as a stable, socially beneficial asset class—and put their money into expanding the affordable rental home marketplace.

Well before the headlines about climbing rents, the nation was and continues to be short millions of affordable rental homes. A whopping 46% of renter households pay $1 out of every $3 they earn on housing—and 24% are paying more than half their income. Those are unsustainable metrics by any measure, and those numbers are from the beginning of 2019, before the world knew of COVID, before inflation, and before the Fed moved aggressively to raise rates. Crisis? We’ve been in crisis mode for some time. Homeownership? When rent is eating up most of your paycheck, it’s a distant dream.

The lack of supply also translates into a grin-and-bear-it reality for millions of families. Their rents continue to climb, but an apartment isn’t like a Toyota; you can’t trade it in for a cheaper model. Instead, the 40% of American households who rent make daily tradeoffs that imperil their ability to save, to grow wealth, and to remain housing secure.

The problem can seem intractable. Horror stories abound of apartment buildings stymied for years in regulatory red tape, or of NIMBY debates over preserving mountain lion habitats that stall new development. But those stories paper over just how much influence federal policymakers have over creating and preserving affordable homes.

For nearly 40 years, the federal government has quietly facilitated one of the most successful public-private investment mechanisms in history—the low-income housing tax credit. In short, the housing credit gives dollar-for-dollar incentives for investors to build and maintain affordable housing.

And Congress has an opportunity to act. Enacting an expansion of the housing credit wouldn’t just be good politics, it’d be the most powerful domestic policy lever legislators can pull to create wealth and upward mobility for millions of Americans. In fact, if Congress doesn’t act, it will effectively slash the program as compared with last year.

Wall Street has a role to play here, too. While much attention has been paid to speculators gobbling up rental housing stock to make a quick buck, the reality is that affordable housing isn’t some high-risk, high-reward gamble. In fact, it’s a steady, stable asset class where investors can garner solid, risk-adjusted returns. The high rollers aren’t going away, but we need to encourage pension funds, life insurance companies, and other investors to view affordable housing as a stable, socially beneficial asset class—and put their money into expanding the affordable rental home marketplace.

To be sure, homeownership continues to be a laudable goal when it comes to wealth creation in America. But our single-minded focus on homeownership has led us into a trap of abandoning the millions of people who can’t or choose not to buy a home. We know that a good home—rented or owned—is a pathway to better health, better educational outcomes, better wages, better economic futures, and basic dignity. But focusing on interest rates and even home ownership is preventing us from solving a problem right in front of us, one that has the potential to impact nearly half of all Americans.