From Buyers to Renters: How Mortgage Limits Fueled America’s Post-2021 Rent Surge

A new working paper from the International Monetary Fund (IMF), authored by Alessia De Stefani of the IMF Research Department, delivers a striking analysis of how the recent wave of interest rate hikes in the United States, when paired with rigid mortgage lending standards, has shut out thousands of aspiring first-time homebuyers. The paper titled “Missing Home-Buyers and Rent Inflation: The Role of Interest Rates and Mortgage Underwriting Standards,” draws on rich data from the American Housing Survey and connects the dots between federal housing policies and mounting pressures in the rental market. The findings contribute to ongoing discussions within prominent economic research institutes such as the Federal Reserve Bank, the Brookings Institution, and the National Bureau of Economic Research (NBER), all of which have recently focused on housing access, inequality, and the indirect effects of monetary tightening.

Between 2021 and 2023, mortgage rates in the U.S. spiked sharply, and De Stefani finds this increase dramatically altered who could afford to buy a home. By 2023, the rate at which renters transitioned into homeownership had plunged by 25%. A key factor in this drop was the Federal Housing Administration's (FHA) 31% mortgage payment-to-income (MTI) threshold, a pivotal eligibility rule for federally insured loans. With higher interest rates, many otherwise qualified households saw their MTIs rise just above this line, disqualifying them from the mortgage market. Through econometric modeling, De Stefani demonstrates that renters just above this MTI threshold were 5% less likely to buy than those just below, even when their demographic and financial profiles were virtually identical.

From Buyers to Renters: A Market Under Strain

This exclusion from homeownership didn’t happen in a vacuum. The displaced demand from first-time buyers spilled directly into the rental market. As households that might have purchased homes remained renters, demand for rental properties surged while supply stayed largely stagnant. Cities with higher proportions of these “constrained” would-be buyers experienced particularly steep rent hikes. By measuring the counterfactual behavior of 2021 buyers under 2023’s interest rate regime, De Stefani identifies how rising rates converted buyers into renters and intensified competition for existing rental stock.

These pressures were especially pronounced in major metropolitan areas like Washington D.C., San Francisco, and Miami. Rent inflation in 2023 was highest in markets where the drop in homebuying due to MTI constraints was most acute. Importantly, these rent increases weren’t driven by broader economic conditions or shifts in population alone. Even after accounting for income, local growth, and housing supply variables, De Stefani finds a direct and robust correlation between the presence of constrained buyers and rent escalation.

Why the Poor Paid More

Perhaps the most troubling dimension of the findings is their distributional impact. The paper uncovers a secondary consequence of this policy dynamic: lower-income tenants were not only more likely to be pushed out of the homebuying pool, but also bore the brunt of the resulting rent increases. Units measuring 750 square feet or less, typically rented by people in the bottom four income deciles, experienced the steepest rent hikes. Vacancy rates in these segments were already low, and increased demand only pushed prices higher.

The research reveals that renters in the lowest income brackets are disproportionately exposed to this kind of inflationary pressure. Not only do they face tighter rental markets, but they also spend a larger share of their income on housing. Even after filtering out renters who received vouchers or lived in rent-controlled units, the trend held firm. The study suggests that the combination of rigid lending rules and aggressive monetary tightening created a compounding disadvantage for lower-income households, one that policy debates have largely ignored.

Past Lessons, Present Failures

To emphasize that today’s challenges are not inevitable consequences of rising interest rates, De Stefani compares the recent episode with the U.S. housing market of the late 1970s. During that era, mortgage rates also rose significantly, yet there was no comparable collapse in first-time homeownership rates. Why? Because underwriting rules were looser and more flexible. In 1978 and 1980, buyers with higher MTIs were still able to access credit thanks to more discretionary lending practices. In contrast, the rigid enforcement of MTI limits in today’s environment has created a cliff-edge that many cannot cross, regardless of their broader financial health.

Her analysis shows that while overall demand declined in the late 1970s due to high borrowing costs, the decline was distributed more evenly across income levels. Today’s credit rules, by contrast, introduce structural barriers that selectively exclude the most vulnerable buyers, reinforcing inequality in both access and outcomes.

A Call for Rethinking Lending Rules

De Stefani’s findings carry serious implications for policymakers, particularly central banks and housing regulators. While raising interest rates is a conventional tool to tame inflation, its downstream effects on inequality and housing access must be carefully considered. Shelter makes up over a third of the U.S. Consumer Price Index (CPI), and the study suggests that rent inflation, exacerbated by homebuying constraints, may have played a role in the stickiness of headline inflation during the tightening cycle.

The paper concludes that the intersection of monetary policy and mortgage underwriting standards must be treated as a critical policy nexus. When rising rates collide with rigid credit rules, the consequences don’t just appear in financial markets, they are felt in neighborhoods, leases, and household budgets. By drawing attention to these second-order effects, De Stefani urges policymakers to reassess the real-world impact of financial regulations that, while designed for prudence, may inadvertently deepen inequality and delay inflation relief.