High Rates Are Making Rents Higher

Two headlines ran within twenty-four hours of each other this week.

One said this is the strongest buyer's market on record. The other said your rent is about to get more expensive.

Reading those side by side should make you think.  Especially because they aren’t two separate stories. They're the same story, just told from two different ends of the same machine.

I want to help you understand how that machine operates because it will help you better understand what’s coming over the next 12-18 months.

Where We Are This Morning

The 30-year fixed hit 7.40% this morning per Freddie Mac, up from 7.28% last week. That is the seventh consecutive weekly increase. A year ago this week it was 6.30%.

The 10-year Treasury is sitting above 5.3%, the highest since 2002. Mortgage applications fell 4.2% last week. Refinance applications are at their lowest level of 2026 and running at less than half of where they were a year ago. That's the bad news, delivered quickly so we can get to the part nobody is talking about.

The Doom Loop

Torsten Slok is the chief economist at Apollo Global Management. This week he laid out something very interesting. His words: "When rates are high, builders build less, and when fewer homes and apartments get built, rents go up, which pushes inflation higher and keeps rates high."

Read that again slowly, because it's a circle, not a line.

Allow me to elaborate…

A builder is looking at a project right now. Land, labor, materials, permits, and construction financing that is priced off the same rate environment you're getting a mortgage in. At 7.4%, a huge number of those projects simply do not pencil. The spread between what it costs to build and what the finished thing can sell or rent for isn't quite wide enough to justify the risk. So the builder doesn't break ground. The demand is certainly there.  Household formations are through the rough and many of them can’t qualify to buy today’s rates – so they need to rent.  It’s the math that isn’t mathing.

We already have the receipts. August housing completions came in at 1,128,000 annualized, down 11.9% from July and down 27.1% from a year ago.

Now here's the part that makes this a trap instead of just a bad quarter. Construction has a delay built into it. The project that doesn't get started this fall is the apartment building that doesn't open in the spring of 2028. So the supply damage we're doing right now doesn't show up for twelve to eighteen months. We are currently living inside the supply that was financed when rates were lower. The hole is being dug behind us.

When that supply doesn't arrive, your landlord has leverage. Not because they're greedy, because there is nowhere else for you to go. Fewer units competing for the same renters means the renewal letter can include a higher amount.

And here's the piece that really seals the loop. Shelter is the single biggest component of the inflation report. Owners equivalent rent plus actual rent is roughly a quarter of the entire CPI basket. So when rents rise, inflation rises. Not metaphorically. Mechanically. It is a line item.

CPI is still running at 3.4% against a 2% target. The Fed looks at that number and says we can't cut rates, inflation isn't contained! Rates stay high. Builders keep not building. Supply keeps shrinking. Rents keep climbing. Inflation stays elevated. 

The cure is feeding the disease.

High rates are supposed to kill inflation by cooling demand. In housing, they're killing supply instead. And killing supply in a market that is already structurally short on housing is inflationary, not deflationary. The tool is working backwards on the single largest line item in the index it's trying to fix.

The Part Nobody Is Factoring In

There's a second squeeze on construction that almost nobody is connecting to this, and it's a market disrupter I've been talking about.

Builders aren't just competing with interest rates. They're competing for skilled labor against AI data center construction. Electricians, pipefitters, concrete crews, heavy equipment operators. The hyperscalers are putting up facilities that cost billions of dollars and they are not price sensitive on labor the way a residential developer with a thin pro forma has to be. When a data center can pay whatever it takes and a 200-unit apartment project cannot, guess who gets the crew.

I have spent a lot of this year arguing that AI is ultimately going to be the thing that brings rates down, and I still believe that. The productivity story is real and it is deflationary over a long enough window.

But this is the near term version of the same trend, and it cuts the other way. In the short run, AI is making it harder and more expensive to build the housing we're already short of. Both things can be true. The long arc is disinflationary.  But I may have been wrong about the timeline…

Where I Push Back on My Own Industry

Now let me argue with the thing I just spent nine hundred words explaining to you.

I don't think this loop runs forever, and I'm suspicious of anyone who tells you it does.

Over the past 14 years, I have watched a lot of these doom cycles get described as permanent. The 2008 narrative was that nobody would ever trust a mortgage bond again. The 2012 narrative was that an entire generation was permanently locked out of ownership. The 2021 narrative was that prices only go up. Every loop like this one eventually runs into something stronger than the loop.

Here, there are at least four things that can break it. The war ends and energy comes down, which takes pressure off the inflation print without anyone needing to build a single apartment. Wages catch up to rents, which changes the affordability math from the income side instead of the price side. Spreads compress further and mortgage rates fall faster than Treasuries. Or construction financing gets targeted relief, maybe as a result of midterm elections, because at some point somebody in Washington is going to notice that the housing shortage is doing more to inflation than almost anything else on the list…right? 

The Other Headline

Which brings me back to the first thing I mentioned.

While all of that is happening, Redfin reported this week that 21.1% of sellers cut their price in September. That's the highest September share since they started tracking in 2022. Sellers outnumbered buyers by 58% in August. Nearly half of buyers are getting concessions.

And the geography tells you something. Denver had price cuts on 30.9% of listings. San Francisco had 9.6%, because AI money is doing to Bay Area housing exactly what you'd expect it to do.

Which is why everyone is so flabbergasted by the state of affairs in housing, stated as plainly as I can state it:

Buyers have more negotiating leverage than at any point in recorded history. And the monthly payment locks most of them out of using it.

Rates went to 7.4% and did two things at once: it thinned the buyer pool so dramatically that the remaining buyers can name their terms, and it raised the payment so much that most people can't be one of the remaining buyers.

I've been calling what’s coming an Owners Market, and this week's data is the cleanest version of it I've seen. If you can carry the payment today, you are buying into a market with no competition, with a seller who will cut price and fund your buydown, with concessions on half of all transactions. You keep that price forever. And when rates finally come down, you refinance the payment while everyone who waited for the rate competes for the house.

But I said something two weeks ago that I'm going to repeat, because I'm not going to pretend my way around it.

If you can't afford the payment at 7.4%, you can't afford the house. The leverage is real and the leverage is also useless to you if the payment doesn't work. There's no reframe that fixes that.

The honest position is this: this is the best negotiating environment I have ever worked in, available to the smallest group of people I've ever seen qualify for it. Figure out which group you're in, and then act like it.

What To Watch

The Fed meets October 28. Markets are pricing roughly a 79.5% chance of a hold. Jefferies called the 29,000 jobs report "the nail in the coffin for an October hike," and I think that's right.

But the hold isn't the only thing to watch. Pay attention to whether anyone at the Fed starts talking about the supply side of shelter inflation.

Because as long as the entire conversation is about cooling demand, the loop keeps running. The demand-cooling tool is the thing restricting supply. Someone at that table has to say out loud that shelter inflation is a construction problem wearing a monetary policy costume, and that higher rates are making it worse instead of better.

Until somebody says that, assume the loop. Plan for elevated rates, rising rents, and the best negotiating leverage of your lifetime sitting right next to a payment most people can't make.

That's the market. I'd rather you see the machine than the headline.