[Week 44 of 2026] House Prices and Rents

Welcome back to Price and Prejudice with a few musings from Week 44 of 2026. Today we talk about how to think about the housing market, and why it helps to think about the rental market at the same time.

The housing headlines this month have been grim, and most of them trace back to monetary policy. Since the war with Iran began in late February, higher oil prices have pushed up inflation. The Fed has subsequently raised rates and signaled it may do more, and long-term interest rates have risen with it, as we discussed a few weeks ago. Mortgage rates generally follow long-term Treasury yields, so the average 30-year mortgage rate is now 7.24%, up from just under 6% in late February. Pending home sales fell to their lowest level since 2014, and deals are falling through at a pace not seen since the start of the pandemic. And yet the median existing home still sold for slightly more than a year earlier, and rents keep rising.

To make sense of this, it helps to step back and think about how the housing market works. If you think about it, a house is really two goods. Primarily, it is a place to live, which you can buy by the month in the rental market. But it is an asset, which you can buy all at once in the purchase market. Naturally, housing has two prices – the rent and the purchase price – and most of what is interesting about housing comes from how the two are connected.

So how are these two different roles connected? First, at the most basic level, you need to choose between the buy vs. rent option. A family that needs a place to live can rent or buy, so if one becomes much more expensive, demand shifts toward the other. Second, a landlord is just a homeowner who rents the home out. That means the purchase price of a house should be tied to the rent it can earn, the same way the price of a bond is tied to its coupons. Finally, homes can move between the two markets over time, as single-family homes become rentals and builders decide whether to build for sale or for rent. For all these reasons, it makes sense to study the two markets at the same time.

The simplest way to put this together is to think of the housing stock as a long-lived machine (a.k.a. "durable good"). In the rental market, the number of homes and the number of households who want them determine the rent. In the purchase market, the price of a home equals the value of all the rent it will earn in the future, discounted at the interest rate and adjusted for wear and tear. In rough terms,

price ≈ rent / (interest rate + depreciation − expected rent growth)

Builders, in turn, respond to the purchase price, so when prices are high relative to construction costs, they build more. And because houses last a very long time, the stock of homes changes only slowly, with new construction adding a small amount each year.

This baseline makes clear predictions about what should happen when interest rates jump. On impact, purchase prices should fall, since the same rents are now worth less when discounted at a higher rate. Lower prices should then lead builders to build less. Over time, less building means fewer homes than there would otherwise be, so rents should drift up, and prices should partly recover. Throughout, the quantity of housing should barely move, since the stock is so large relative to new construction.

If you compare this prediction with the opening facts, the baseline gets two things right and one thing wrong. Builders are building less and cutting prices, and rents are rising. But existing-home prices have not fallen. What adjusted instead was activity. The puzzle is even sharper once you compare the cost of buying and renting. Zillow estimates that a new buyer of a typical home spends about 41% of the median income on the mortgage, compared with about 26% for a new renter. In the baseline, a gap like this cannot last, so the interesting question is what the baseline leaves out.

The first thing it leaves out is that most current owners have a mortgage with a fixed rate well below today’s (about half pay less than 4%). An owner who sells to move gives up that rate and has to borrow again at the new one, so many owners who would otherwise move simply stay put. Economists at the FHFA estimate that this lock-in prevented about 1.7 million sales over two years and raised prices by about 7%. The key point is that lock-in reduces supply and demand together, since the family that does not sell its house also does not buy the next one. That is how sales can collapse while prices hold up.

The second thing is that not every seller is locked in. Builders have no mortgage to protect, and they have to sell the homes they build. So builders are where the price adjustment that the baseline predicts is actually happening, and the median new home now sells for less than the median existing home.

The third thing is that the rental market is also two markets. Families who cannot afford to buy a house mostly want to rent a house, not an apartment, so house rents are rising. Apartments, meanwhile, are still absorbing a large wave of new supply from the building boom of the last few years, and the rental vacancy rate is the highest since 2020. So whether rents are rising depends on which rents you look at.

The last thing is who is actually able to move between the two markets. Buying requires a down payment and a mortgage approval, so many renters cannot switch to owning even when owning would pay off in the long run (the median first-time buyer is now apparently 40 years old). Investors, the other link between prices and rents, are pulling back as well, and a law enacted in July will bar the largest single-family landlords from buying more homes starting next year.

So when do existing-home prices finally fall? One way is time, as owners eventually move for reasons that have nothing to do with rates, such as a new job, a new baby, or retirement. Another is a weaker economy, since losing a job forces a sale in a way a high mortgage rate never does. Or prices may never fall at all, and mortgage rates come down instead, making owning cheaper without making houses cheaper. Either way, the rate hikes have landed on the people trying to get into the market, i.e., renters, first-time buyers, and builders, while existing owners, with their payments locked in, have barely felt them.

Other Stuff

• Hackers stole $6.3 billion from Binance in what appears to be the largest crypto heist on record.
• DoorDash is buying Instacart, combining the two largest delivery platforms outside Amazon.
• The owner of the New York Stock Exchange is taking steps to bring Hyperliquid’s perpetual futures to the US, another sign that perps (discussed previously here) are moving from crypto into mainstream markets.