US inflation: The catch-22 of high rates and high house prices

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Elevated shelter inflation is keeping interest rates higher for longer. But high rates hold back the construction that could lead to lower rents and house prices.

Already a subscriber?It may seem counterintuitive to suggest that today’s high interest rates will fuel shelter inflation down the road. After all, the Federal Reserve has tightened monetary policy to stamp out price pressures in the economy.

Some metros saw a surge of new projects and now have very little housing inflation, while others missed their chance and continue to see upward pressure on home prices and rents. Perversely, elevated shelter inflation is a major factor leading the Fed to hold rates higher for longer, hindering construction.

Financing costs have also contributed to market share shifts within the homebuilding industry, with implications for the pace of construction in different parts of the country.

 

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