In September the Federal Reserve raised its benchmark rate for the first time since 2023, to a range of 3.75% to 4%. Most Fed officials expect at least one more increase before the end of the year. The goal is to bring inflation back down toward 2%.
Higher rates do cool a lot of the economy. Housing is different, and the effect there is close to the opposite of what the Fed wants.
Start with homes for sale. Many owners locked in low mortgage rates years ago. If they sell, they give up that rate and take on a much higher one for their next home. So a lot of them stay put. Fewer houses come on the market, and the ones that do sell quickly.
Higher rates also make new construction harder. Builders and developers pay more to borrow, and some projects stop penciling out. That holds back new supply at the same time existing owners are holding on to what they have.
Then look at who is left. People who would have bought a home can't find one, or can't afford the payment at today's rates. Most of them keep renting. That adds demand for apartments in a market that was already short on units. With more renters competing for the same buildings, landlords can raise rents.
Here is the irony. Housing costs are the largest single piece of the consumer price index. When rents go up, inflation stays high. Stubborn inflation gives the Fed a reason to raise rates again, and the cycle repeats. Higher rates mean fewer homes for sale. Fewer homes mean more renters. More renters mean higher rents, and higher rents keep inflation up.
Connecticut has had a housing shortage for years, so this cycle hits here harder than in markets with room to build. For apartment owners, it supports rents and values. For lenders, estates and investors, it is a reminder that rents are moving quickly. A value based on rents from a year or two ago can fall short of today's market. When we appraise apartment buildings or prepare a rent study, we use current local rents for that reason.
These notes are general market observations, not an appraisal of any specific property.
