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Key takeaways

  • Rising home values and persistently higher interest rates continue to create housing market challenges.

  • Home sales remain sluggish, though housing demand appears to remain strong.

  • REITs continue showing signs of recovery.

Persistently high mortgage rates combined with lofty home prices serve as headwinds to housing market activity. Sales of existing homes remain well below normal pre-pandemic levels. At the same time, new Trump administration policy initiatives may create challenges for the home construction industry.

“The supply of existing homes on the market is low,” says Tom Hainlin, national investment strategist at U.S. Bank Asset Management Group. “It remains a function of current homeowners unwilling to trade their lower-rate existing mortgage for a higher-cost new mortgage.” Over the last 18 months, the average 30-year mortgage rate, which was near 3% at the end of 2021, has fluctuated mostly between 6% and 7%. 1

Source: Federal Home Loan Mortgage Corporation (Freddie Mac). Data as of June 18, 2025.

Mortgage rates generally follow the trend of U.S. 10-year Treasury notes. Notably, the yield spread between 30-year mortgages and 10-year Treasuries remains high. “Today’s mortgage rates reflect bond market yields, but also a relatively wide premium between 10-year U.S. Treasury notes and mortgage rates,” 2 says Rob Haworth, senior investment strategy director at U.S. Bank Asset Management Group.

Source: U.S. Bank Asset Management Group Research, Bloomberg, June 24, 2025.

The relatively wide yield spread indicates investors aren’t flocking to the mortgage debt securities market. In addition, notes Haworth, the Federal Reserve continues reducing its holdings of mortgage-backed securities, requiring other buyers to step up. Lacking higher demand, mortgage yields are likely to stay higher for longer.

Homes increasingly unaffordable for the average household

After declining modestly at the end of 2024, home prices are up 2.75% through April 2025. Home prices in the current decade gained more than 56%, although the pace of increase recently slowed. 3 As the chart below indicates, the median home price with a 20% down payment requires over a full year of household income and monthly mortgage payments that are 35% of household income for the median earner.

Median down payment and mortgage payment relative to household income

Sources: U.S. Ban Asset Management Group Research, Bloomberg: March 31, 2000-March 31, 2025. Assumes median existing single family home price with a 20% downpayment, national average mortgage rates, and median household income.

“While current home sales are slower than usual, it seems strong housing demand still exists,” says Haworth. “Solid demand is keeping home prices high despite deteriorating affordability.” The median monthly mortgage payment in June 2025 (based on average 30-year mortgage rates and home prices) was $2,820, a drop from May’s record high. 4

Sales activity lags

After showing some positive signs in early 2025, existing home sales can best be described as sluggish. According to the National Association of Realtors, May existing home sales were less than 1% higher than April’s sales. Disappointingly, home sales were 0.7% below the May 2024 level, representing the slowest activity level during the month of May in 16 years. 5

May’s sales rate amounts to 4.03 million in annualized existing home sales. “Historically, annual existing home sales average more than 5 million,” says Hainlin. The rate was as high as 4.29 million in December but has fallen since. 5

Haworth notes that the annualized home sales rate underrepresents the number of potential buyers bidding on homes. “We’re undersupplied on existing home inventory, and bidders have to chase existing supply,” says Haworth.

“The  supply of existing homes on the market is low. It remains a function of current homeowners unwilling to trade their lower-rate existing mortgage for a higher-cost new mortgage.”

Tom Hainlin, national investment strategist with U.S. Bank Asset Management Group.

Recently, new home construction experienced better results. In April, sales of new single-family houses rose to an annualized rate of 743,000, an 11% increase from March sales and 3.3% higher than the same month in 2024. 6 While the numbers are encouraging, it’s unclear whether the sales momentum can be sustained.

“Any change to the three major inputs, material costs, labor costs, and borrowing costs, will influence builder confidence,” says Hainlin. “Builders need to feel confident they can price homes appropriately given those cost inputs.”

A growing concern are potential construction cost trends. “The U.S. only meets about 70% of its housing lumber demand, with 80% of imports to close the demand gap coming from Canada, 7” says Haworth. President Donald Trump’s implementation of higher tariffs on foreign goods could lead to increased lumber prices. “Prices of other construction components such as copper and steel have also risen, adding to costs,” notes Haworth.

REITs enjoy a modest recovery

Some investors seeking to enhance portfolio diversification turn to real estate investment trusts (REITs). In recent years, REITs have underperformed. On an average annualized basis for the five-year period ending in 2024, the S&P Developed REIT index gained just 1.59%, compared to 14.53% per year for the S&P 500 index. In 2025, REITS regained some ground, returning 5.40% year-to-date compared to 3.11% for the S&P 500. 8 “This is still a very interest-rate sensitive sector,” says Haworth. “REITs have performed better so far this year as mortgage rates remained relatively stable and market activity is steady.”

Be sure to consult with your wealth management professional to determine when and how real estate investments might be a good fit for you.

Frequently asked questions

Housing prices fell over a seven-month period in 2022 and early 2023 and housing demand dropped when mortgage rates first began to rise. However, housing prices recovered to new record levels in late 2023. After declining in three consecutive months in late 2023 and early 2024, housing prices recovered beginning in February 2024 and reached new all-time highs in consecutive months from March through July 2024. From August through December 2024, housing prices modestly declined, then recovered modestly in early 2025. 3 Homebuyers must deal with dual challenges of persistently elevated mortgage rates and still lofty home prices.

The decision to purchase a home may depend on many factors, including your own personal priorities and financial situation. Some people may require a larger living space or have a desire to settle in a specific community. Those priorities may take precedence over the current mortgage rate environment. “Some people will also buy the home that appeals to them regardless of mortgage rate conditions,” says Rob Haworth, senior investment strategy director at U.S. Bank Asset Management. “Finding a different home down the line does not automatically substitute for the preferred house you find today.” While in an ideal world, mortgage rates would be more affordable, each potential homebuyer must determine the right time to purchase a house.

Interest rates began moving up in 2022, and mortgage rates followed suit. Today’s mortgage rates are close to double the rates that existed in 2021. 1 As a result, homebuyers are required to make higher monthly mortgage payments. This caused some potential homebuyers to step back from the housing market. At the same time, it led some current homeowners who potentially were interested in moving to a different house to hold off doing so, and preserve their current, low mortgage rate. Therefore, housing activity has slowed significantly, attributable primarily to the recent change in the interest rate environment.

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Disclosures

  1. Freddie Mac, “Primary Mortgage Market Survey®” as of June 18, 2025.

  2. 30-year mortgage rate: Federal Home Loan Mortgage Corporation (Freddie Mac). 10-year Treasury note yield: Board of Governors of the Federal Reserve System. Data retrieved from FRED, Federal Reserve Bank of St. Louis

  3. U.S. Bank Asset Management Group Research, Bloomberg, as of June 24, 2025.

  4. Anderson, Dana, “U.S. Home Prices Hit All-Time High,” Redfin News, June 20, 2025

  5. National Association of Realtors, “NAR Existing-Home Sales Report Shows 0.8% Increase in May,” June 23, 2025.

  6. U.S. Census Bureau, “Monthly New Residential Construction,” April 2025,” May 23, 2025.

  7. Source: National Association of Home Builders, “NAHB Good and Bad News on Lumber Production and Tariffs,” April 8, 2025.

  8. Source: S&P Dow Jones Indices.

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