Real estate prices are soaring; rent, predictably, has followed. It is becoming an increasingly large component of our current inflationary episode; it also creates serious social problems. Can the Fed do anything about it?
This one is complicated. On the supply side, the problems are the rising cost of materials, the lack of available labor, and density constraints imposed by local governments. The Fed can’t do anything about these issues; in fact, by making financing more difficult for multi-family projects, it might actually make things worse by raising rates. On the demand side, raising interest rates would increase the cost of buying a unit, and thus reduce sales and, ultimately, prices; on the other hand, prices have already gone up dramatically without crushing demand, due largely to demographics and the impacts of the pandemic, so who is to say that increasing the cost of financing would make much of a difference? In addition, a substantial number of sales in the recent past have been for cash. The Fed has no control over those.
On balance, the case for reducing rents by raising rates is unpersuasive.