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

Housing does more than shelter households – it powers the U.S. economy and shapes how investors think about consumer strength. Housing-related spending accounts for 15-18% of the nation’s Gross Domestic Product (GDP), ¹ and real estate represents the largest share of household assets. ² When home values rise, many households increase spending, reinforcing the “wealth effect” that links asset prices to day-to-day economic activity.

Home prices stabilized in most regions in 2025 after several years of rapid gains. This shift signals a market moving from scarcity-driven acceleration to a balance of home supply and demand. Prices surged 40% from June 2020 to June 2022, but growth slowed to 8.7% through November 2025, reflecting changing buyer behavior and affordability limits. ³ In November, the S&P Cotality Case-Shiller index showed 1.4% year-over-year growth, while Zillow data suggested near-zero year-over-year price growth through December.

Housing supply is improving, but the market still faces friction

Housing supply hasn’t fully normalized because many potential sellers choose not to move. Homeowners who secured low fixed-rate mortgages before rates began rising in 2022 often avoid listing because selling could mean giving up cheap financing and their next home may be less affordable. Over the past year, the number of homes for sale increased and then stabilized from July through October, signaling progress on inventory – but also a cautious market.

Even as supply improves, affordability continues to challenge buyers because higher interest rates and elevated prices push monthly payments upward. That payment pressure can cool demand, even while rising incomes and low unemployment help support consumer confidence. As more home choices reach the market, supply has started to weigh on closing prices, nudging conditions toward a more negotiated environment rather than a rush to bid.

“Since the pandemic, home price appreciation has outpaced wage growth, making starter homes less attainable for many,” says Bill Merz, head of capital markets research for U.S. Bank Asset Management Group. “Meanwhile, high borrowing costs discourage homeowners from moving, since their monthly payment would likely rise, even for a similar property.” Together, these forces can keep prices relatively firm while still suppressing transactions, because the true constraint is often the monthly payment rather than the headline price.

What comes next for the housing market in 2026 test and investor implications

Looking ahead, rising incomes and potentially lower mortgage rates could improve affordability and support demand without requiring a dramatic drop in home prices. “Fed rate cuts could help bring mortgage rates lower, supporting housing demand, although interest rates already price in expectations of additional rate cuts later in 2026,” says Merz. “However, more homes are lingering unsold, and more listings are being pulled from the market, making the 2026 spring selling season a critical test for housing demand.” ⁴

Interest rate markets price in two Federal Reserve cuts in 2026, and that expectation could matter most if longer-term rates decline as well. ⁵ Lower mortgage rates can translated into lower monthly payments, which often does more to revive demand than modest changes in list prices. If demand keeps pace with rising supply, housing may avoid becoming a drag on economic growth, even if prices soften in pockets where inventories build.

Investors can take advantage of elevated home equity by considering non-agency residential mortgage bonds, which offer higher yields than other fixed income investments. Significant home equity provides collateral support, even without government backing. Also, existing homeowners have a strong incentive to remain current on mortgage payments because a default risks them losing both their home equity and cheap fixed-rate financing.

At the same time, rising time-on-market and price concessions suggest sellers should plan for longer timelines and sharper pricing discipline, while buyers may gain negotiating leverage if supply continues rising.

FAQs

How do rising interest rates affect the housing market?

Interest rates began rising in 2022, and mortgage rates followed. Today’s mortgage rates are close to double the rates that existed in 2021. ⁶ As a result, homebuyers must 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 to preserve their current, low mortgage rate. Therefore, housing activity has slowed significantly, primarily due to the recent change in the interest rate environment.

If I own a home, should I still invest in Real Estate?

Home ownership can be an important way to build wealth and savings through rising home prices and the pay-down or amortization of a mortgage. Other real estate investments offer value and income drivers distinct from home ownership and enhance portfolio diversification. Real estate sectors, such as industrial properties, data centers, cellular towers, and healthcare properties offer unique opportunities which are less correlated with housing. It is important to consult with your advisor to determine the appropriate allocation given your unique circumstances.