US home-ownership and renting – more trouble with the curve?

The US housing market faces a turning point. As elevated mortgage rates, limited inventory, and the Fed’s shifting policy reshape affordability, more Americans are turning to renting. This insight explores the complex relationship between homeownership, rental trends, and interest rate cycles—and what it means for investors and consumers.

Lock-in effect: Low fixed-rate mortgages have restricted housing supply, pushing prices higher despite rate hikes.

Renting resurgence: With ownership costs far exceeding rents, the multifamily rental market is rebounding in 2025.

Fed policy twist: Mortgage rates above 4% limit refinancing and slow the traditional impact of Fed easing on housing.

Homeownership has long been considered a cornerstone of “the American Dream”, with a strong sense of pride and security, plus the possible benefit of wealth building over time through property price appreciation. This was actively encouraged as far back as the Clinton administration in the 1990s, with home ownership increasing to 67.7%[Note1]  by 2000, with initiatives like the Community Reinvestment Act.

On the other hand, renting offers flexibility, lower upfront costs, and no ongoing costs like property taxes and maintenance. In general, the choice to buy or rent property depends on personal finances, lifestyle, and future plans. There are also other factors which influence the decision. Buying can be cheaper for those wishing to stay many years, who foresee strong home value appreciation over time. Meanwhile, renting may be a safer option when expected rental rate growth is limited. More importantly, housing and rent affordability (driven by home price, rental rates, mortgage rates, and personal income) put constraints on buyer and renter options directly.

In addition, the shock of the COVID pandemic, its recovery, and evolving Fed policies in the last few years, have caused major changes in housing and lifestyle preferences, driving shifting dynamics between the appeal of buying and renting property. This has had a profound impact on the residential housing market and multifamily rental market, as well as the transmission mechanism of Fed monetary policy[Note2].

During the early stage of the pandemic (1Q20 to 1Q21), social distancing and remote working caused many to abandon city apartments and move to the suburbs. Demand for senior apartments and student housing was also hit hard. 

Meanwhile, Exhibit 1 shows that fueled by demand for living space, the residential housing market paused only briefly before rebounding strongly with the help of government mortgage support schemes, with the Case-Shiller housing price index rising by 12%. In comparison, multifamily property prices rose only by 3% in the same period with rental income dropping 1%.

Exhibit 1 also shows that from 1Q21 to 2Q22 (the later stage of COVID), property buying continued to be favored as low mortgage rates and rapid home price increases enticed more buyers into the market. House prices increased by 26% in this period. In the meantime, the multifamily rental market also recovered nicely with property values up by 25% and rental income up by 24%, driven by low interest rate and government subsidies. It’s noteworthy that the rent hikes during this period contributed significantly to the inflation surge, which led to the Fed tightening cycle starting in March 2022.

Starting from 2Q22, however, Fed tightening soured market sentiment and caused a downturn in both residential housing and commercial multifamily units. But in contrast to the multifamily rental market, which continued to decline, the residential housing market quickly rebounded in 4Q22.

High interest rates, coupled with rising operating expenses (tax/insurance/maintenance) and slowing rent growth, have created a very challenging environment for the multifamily market. Rental income growth became anemic as occupancy struggled amid high supply pressure. Indeed, from 2Q22 to 4Q24, multifamily properties lost 18% in valuation as the cap rate rose[Note3] and net operating income weakened. In contrast, after a 5% dip from 2Q22 to 4Q22, the residential housing price regained steam and rose 10% from 4Q22 to 4Q24. Why was this?

The strength of the housing market was helped by low inventory despite high interest rates. The tight inventory was caused by the lock-in effect of homeowners whose in-place mortgage rates are way below the current market rate. Thus sellers preferred to stay put while buyers were forced to enter bidding wars for limited housing supply, driving up house prices.

Entering 2025, homeownership became increasingly out of reach for Americans as housing affordability and availability worsened, shifting the dynamics between owning and renting. The scale of the shift in dynamics is shown by US house prices gaining 53% from 1Q20 to 2Q25, despite mortgage rates remaining elevated in the 6%-7% range. As a result, more and more multifamily tenants were priced out of the house purchase market. 

Though the cost of renting also increased with inflation, renting is still more affordable than owning in general. According to Newmark, the median monthly homeownership cost was $3,069 in 2Q25 compared to the average monthly rent of $1,869/unit, putting the difference between the monthly cost to own and rent at $1,200, vs. the historical long-term average around $400.

Such a major change in relative pricing between home ownership and rental units has increased the attractiveness of the rental sector. As the Fed slowly eased rates since September 2024, the multifamily rental market finally seems to be bottoming out as the cap rate stabilizes and inflation moderates (Exhibit 1). Rental income has recovered with rental growth and occupancy, helped by a rebound in demand and more balanced supply-absorption (Exhibit 1).

On the other hand, hampered by elevated mortgage rates, rising unemployment and economic uncertainty, the residential housing market has shown modest signs of stress in 2025 with home sales slowing down and rising housing supply. 

In a normal housing market cycle, lower Fed rates would be expected to boost demand for housing as mortgage rates fall, and affordability improves.  But there are several cross-currents at work in the current cycle, which complicate both the transmission mechanism of Fed monetary policy, and the impact of lower rates on housing. On the demand side, while Fed rate cuts may ease housing affordability to some degree - the 30yr mortgage rate has dropped to 6.3% recently from the peak of 7.3% in 4Q23, as Exhibit 2 shows-  the impact is likely to be softened by the current 30 year fixed mortgage rate being well above the 4% in-place mortgage rate most borrowers hold.

Also, with the US Treasury curve steepening on increased debt issuance fears, longer dated yields may remain elevated, despite rate cuts. This complicates the transmission mechanism since the cost of housing finance is closely correlated with 10 year Treasury yields, as the Exhibit 2 also shows. So if lower Fed rates do not reduce 10 yr yields and mortgage rates to below 4%, homeowners are unlikely to refinance mortgages and move house. Alternatively, if they do fall below 4%, this may prompt a surge in borrowing, so there may be a non-linear impact of lower Fed rates on construction activity, house prices and the US economy in this easing cycle.  But unless and until mortgage rates decline to these levels, the economy may continue to show lower interest rate elasticity and less recession risk than in previous cycles. This may also help explain why the inverted 10s/2s curve in 2022-23 has not been followed by a US recession, to date.

Turning to housing supply, although it has picked up recently, low mortgage delinquencies, comparatively low unemployment, and homeowners with substantial accumulated equity  mean there is little forced selling. Improved underwriting standards after the GFC have also contributed to a generally favourable mortgage credit profile.