The impact of today’s changing interest rates on the housing market

The U.S. economy relies heavily on the housing market. Low affordability, elevated mortgage rates, slow activity and recent price declines in certain markets present questions about the real estate market’s direction and its impact on the economy, homeowners and investors.

Housing contributes to economic growth and household net worth. Housing-related expenditures comprise 15-18% of Gross Domestic Product (GDP) in the U.S., the primary measure of economic output. ¹ Real estate also forms the nation’s largest share of household assets. ² For many, their home is their largest asset, creating an important “wealth effect.” The “wealth effect” is an economic theory suggesting consumer spending changes with changes in asset values; when home and other asset prices rise, consumer spending tends to increase, and the reverse is also true.

Home prices stabilized in certain markets this year after solid gains over a few years. Recent slowing price appreciation has followed rapid gains post-Covid, with prices rising 40% from June 2020 through June 2022, but just 8% since then through June 2025.

Barriers to an improving housing market persist

Until recently, a limited number of homes for sale dragged on activity. This partially resulted from existing homeowners’ hesitancy to sell. They face high costs to switch homes because they would lose their cheap fixed rate financing, which many locked in before interest rates started rising in 2022. Over the past year, the inventory of for-sale homes trended significantly higher.

Prospects for improving home affordability

Affordability remains challenging for prospective buyers due to higher interest rates paired with higher home prices, both of which place upward pressure on potential monthly payments. This affordability challenge dampens demand, offsetting the previous weakness in existing home supply. However, rising inflation-adjusted incomes and low unemployment help consumer wealth and confidence, supporting housing market stability. Furthermore, increasing supply in the last year contributes to more choices for prospective homebuyers, while also beginning to weigh slightly on closing prices.

“Since Covid, home price appreciation exceeded wage growth, making starter homes less attainable for young people,” says Bill Merz, head of capital markets research at U.S. Bank Asset Management Group. “Meanwhile, high borrowing costs make it difficult for existing homeowners to move, since their monthly payment would likely rise, even for an equivalent house.”

Where the housing market goes from here

Looking ahead, rising incomes and potentially cheaper mortgage rates could balance some of the tension between rising supply and low affordability. “Fed rate cuts could help bring mortgage rates lower, although interest rates already price in expectations of some rate cuts,” says Merz. “If mortgage rates decline and real income growth remains healthy, it could support housing demand and help offset higher supply.”

Interest rate markets price in four to five Federal Reserve interest rate cuts between September 2025 and June 2026, which could ease mortgage rates and improve affordability if longer-term U.S. interest rates ease as well.

Residential housing market activity may not cause significant changes to economic growth in the coming quarters if demand growth meets rising supply. While prices may soften, we do not expect the housing market to act as a large drag on economic growth due to consumer resilience and cheaper financing costs.

Diversified investors can take advantage of elevated home equity by considering investment opportunities in non-agency residential mortgage bonds, which are not backed by the government. These bonds offer incremental yield relative to other fixed income investments. Significant home equity means ample collateral supporting the bonds, even without a government guarantee.

Recently, time-on-market and price concessions have risen, suggesting potential home sellers should allow ample time to sell and emphasize pricing strategy when preparing to list their home. Home buyers may have stronger negotiating leverage as long as supply continues rising. Modestly declining mortgage rates lower monthly payments, or alternatively, provide more buying power.