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

The U.S. economy relies heavily on the housing market, which shapes both economic growth and household wealth. Housing-related spending accounts for 15–18% of the nation’s Gross Domestic Product (GDP), ¹ and real estate forms the largest share of household assets. ² When home values rise, consumers tend to spend more, illustrating the “wealth effect” that links asset prices to broader economic activity.

Home prices stabilized in most regions this year after several years of rapid gains. From June 2020 to June 2022, prices surged by 40%. Since then, through September 2025, housing value growth slowed to 7.8%. ³ This moderation followed a period of intense post-pandemic appreciation, reflecting shifting market dynamics and buyer sentiment.

Barriers to a stronger housing market remain

Until recently, a limited number of homes for sale dragged on activity. Many homeowners hesitate to sell because they would lose their low fixed-rate mortgages, which they secured before rates began rising in 2022. Over the past year, the number of homes for sale increased and then stabilized from July through October, signaling a cautious but steady shift in inventory.

Prospects for improving home affordability

Affordability continues to challenge buyers as higher interest rates and elevated home prices push monthly payments upward. This pressure dampens demand, even as rising incomes and low unemployment help support consumer confidence. Increased supply has started to give buyers more choices and is beginning to weigh on closing prices.

“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 at 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.”

Where the housing market goes from here

Looking ahead, rising incomes and potentially lower mortgage rates could ease affordability concerns. “Fed rate cuts could help bring mortgage rates lower, supporting housing demand, although interest rates already price in expectations of some rate cuts,” 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 one more Federal Reserve cut in 2025 and three in 2026, which could further improve affordability if longer-term rates also decline. ⁵

If demand keeps pace with rising supply, the housing market may avoid becoming a drag on economic growth. Prices may soften, but resilient consumers and cheaper financing should help stabilize the market.

Investors can take advantage of elevated home equity by considering non-agency residential mortgage bonds. These bonds offer higher yields than other fixed income investments. Significant home equity provides ample collateral, even without government backing, making these bonds an attractive option for diversified portfolios.

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.