Earlier this month, during his testimony on Capitol Hill, Jerome Powell said the US housing market’s “in a very, very difficult situation.”

He conceded the Fed didn’t fully anticipate the potential for rate hikes to create an acute shortage of resale supply, thereby underpinning prices that might’ve otherwise cooled in the face of constrained demand. In that respect (and several other respects besides), rate hikes have been inflationary.

Everyone generally assumes the supply shortage will abate as rates come down. To a certain extent that’s surely true. But have a look at the figure below, which I highlighted last week.

The effective rate on the national stock of outstanding mortgage debt is below 4%. The 30-year fixed is currently 6.9%. It’s hard to see rates coming down enough to effectuate a supply sea change. That, in turn, suggests the affordability calculus for would-be buyers will remain extremely challenging in virtual perpetuity.

As we’ve seen over the last several months, the market’s now even more sensitive to rates than usual. Even small movements in financing costs can activate or sideline significant marginal demand. In the latter case (when demand’s driven back onto the sidelines due to an uptick in mortgage rates), the knock-on effect is an increase in rental demand and, ultimately, rents.

Given that mortgage rates are 25bps higher YTD, it’s not surprising that asking rents rose 2.2% in February, according to Redfin data released this week. Although some of that was due to the base effect, “another factor driving rents up [was] the jump in mortgage rates last month,” as Lily Katz noted.

This time last year, asking rents troughed (that’s the base effect), but it’s important to note that the low point was still in excess of $1,900, up some 18% from pre-pandemic levels. As of this February, rents were 24% higher compared to February 2020, the month before COVID truly went global.

There’s no right answer if you’re the Fed. Cutting rates would surely spur demand for what little resale inventory exists, and it’s entirely possible that the associated competition for scarce properties would outweigh additional supply from the perspective of prices. Not cutting rates will prolong the supply shortage, likewise bolstering prices and driving more would-be buyers into rentals, pushing up rents to the detriment of the inflation fight.

Redfin’s Chief Economist Daryl Fairweather summed up the situation as it stands now. “With rates still elevated, many are opting to continue renting, which is buoying rental demand, and as a result, rent prices,” he said.

“Very, very difficult” indeed.