According to a report by the National Low Income Housing Coalition, the U.S. has a shortage of 7.1 million rental units.
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That supply shortage has driven enormous rent spikes in recent years, with Consumer Affairs reporting that nationwide rents surged 23.4% between 2020 and 2022 alone. While rent growth has slowed over the last two years, it continues to drive up the cost of living in many cities.
Housing Disproportionately Drives Inflation
The Bureau of Labor Statistics combines the costs of many goods and services to calculate its consumer price index (CPI) inflation figure. But it weights those costs differently — and housing makes up about 35.5% of the total inflation rate.
So even if other costs, such as groceries, were going down in price (which they’re not), fast rent growth could still cause high inflation rates.
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Interest Rates Remaining Higher for Longer
The Federal Reserve started cutting interest rates in the second half of 2024, feeling confident that inflation was slowing. But the sudden appearance of tariffs caused it to fear heating inflation once again, and it’s paused rate cuts to see how the economy responds to new tariffs.
“Since housing is a big part of the CPI, persistently high rents are keeping inflation stubbornly high,” explained Yancy Forsythe, founder of Missouri Valley Homes. “That makes it harder for policymakers to ease rates.”
Higher interest rates make it more expensive for consumers to borrow and buy, and for businesses to borrow and expand by hiring. It puts a brake on the economy for both businesses and consumers.
Uneven Housing Shortages
Some cities have a surplus of rental housing. Austin, Texas, for example, has a high multifamily vacancy rate of 9.6%, according to Apartment List.
Others have dire shortages. Perennially difficult San Francisco has a vacancy rate of just 3.8%.
“With a rental vacancy rate of just 0.6% (a fraction of the 5% considered healthy), we’re facing a critical shortfall of 23,500 units right now. This scarcity doesn’t just hurt families — it puts pressure on wages, fuels inflation, and distorts our whole economy,” said Carla Gericke, who works as a real estate agent at Porcupine Real Estate in New Hampshire.
Even within individual cities, some neighborhoods have housing shortages while others have plenty of units available. A July study by Moody’s Analytics found that most of the housing shortage appears in the lower- and middle-income neighborhoods, with housing surpluses in higher-income districts.
Red Tape for New Housing
Why do some cities have plenty of housing, while others continually struggle with affordability and availability?
Cities with abundant housing, such as Austin, Phoenix (7.9% multifamily vacancy rate) and Dallas (8.2%), encourage the construction of new housing supply. Other cities limit zoning of higher-density housing, and layer on regulations and fees that deter new housing development.
“The tightest rental markets right now are in coastal and high-income metros like San Francisco, Seattle, Boston, and San Diego where the supply constraints, zoning restrictions and booming demand have created rent spikes and ultra low vacancy rates,” Forsythe said. “In San Francisco for example, rents rose by more than 11% year-over-year, while rental vacancy rates have dropped to half the national average.”
Affordable housing shortages will likely keep fueling inflation, slowing interest rate cuts and pinching lower-income families until there’s more of it.
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This article originally appeared on GOBankingRates.com: Housing Crisis 2025: Why Rental Shortages Could Spike Your Living Costs
