The Higher Rental Rates May Push Mortgage Rates Up

mortgage-rates

The market for apartment rentals achieved its highest performance level for the past 6 years in May 2014 when the occupancy rate reached 95%. The rental rates are going up due to the strong demand which is still higher than the growing supply. This coincides with the lowest mortgage rates in a year. In this situation, there are fears that the inflationary pressure which the higher rental rates create may cause mortgage rates to rise.

In May 2014, the apartment rental rates rose by some 3.5%. This was the highest increase in 16 months. The upward trend is expected to remain as the demand for rental units will continue to climb at a faster pace than supply. Analysts determine the major factor for the growing demand to be the inability of many young people to secure a mortgage loan for buying a house. They do not have sufficient savings for a down payment and the high credit scores required for mortgage approval. That is why they prefer to rent an apartment rather than to buy a house.

The analysts who predict that the rising rental rates will have an impact on the mortgage rates explain this with the fact that housing has the largest weight to the overall consumer price inflation. As the rise in rental rates continues to push inflation upwards, these analysts predict that the Federal Reserve may be forced to increase the interest rates in order to keep inflation under control.

Other economists, however, consider this scenario to be highly unlikely in the current situation. They explain that adjustments in the monetary policy of the country are not the appropriate tool for regulating the rental rates. Additionally, they point out that so far the Federal Reserve has shown considerable tolerance for the recent increases in inflation.

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The only factor which can slow down the rise in rental rates is growth in the economy. It will bring stability in the mortgage and housing markets as well.
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