Missing Home-Buyers and Rent Inflation: The Role of Interest Rates and Mortgage Underwriting Standards

IMF Working Papers, May 9, 2025

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Canonical URL: Missing Home-Buyers and Rent Inflation: The Role of Interest Rates and Mortgage Underwriting Standards

Research question: How does monetary policy interact with mortgage underwriting standards to shape tenure decisions and rental market equilibria?
Context: Analysis focuses on the period when mortgage rates rose between 2021 and 2023 and implications for first-time home-buyers and rental markets.

Data source: Property-level data from the American Housing Survey.
Identification: Changes in mortgage rates between 2021 and 2023 are used to assess how underwriting constraints (specifically FHA mortgage payment-to-income limits) affected access to home-ownership for potential first-time buyers.

Mortgage-rate impact on access:
- The increase in mortgage rates between 2021 and 2023 pushed many potential first-time home-buyers above FHA mortgage payment-to-income limits, restricting their access to home-ownership.
Rental market effect:
- Restricted access to home-ownership resulted in additional demand pressure on local rental markets, contributing to rent price inflation in 2023.
- Rentals located in cities with larger shares of constrained first-time buyers experienced steeper price growth, controlling for unit characteristics and contemporaneous economic developments.
Distributional consequences:
- Rent inflation was more pronounced in smaller units occupied by lower-income renters, underscoring the potential for second-round distributional effects of monetary policy.

Interaction channel: Monetary policy (through higher mortgage rates) can propagate to the rental market via mortgage underwriting standards that limit first-time buyers’ ability to convert from renting to owning.
Distributional concern: Rent increases concentrated in smaller units and among lower-income renters point to equity implications when tightening monetary policy coincides with strict payment-to-income underwriting thresholds.
Considerations for policymakers:
- Evaluate how mortgage underwriting rules (for example, payment-to-income thresholds) interact with interest-rate movements when assessing broader housing-market and distributional outcomes of monetary policy actions.
- Monitor rental-market pressures in areas with large shares of potential first-time buyers who are close to underwriting limits.

Source: Missing Home-Buyers and Rent Inflation: The Role of Interest Rates and Mortgage Underwriting Standards, Alessia De Stefani, May 9, 2025.