Key takeaways
- Home prices are reaching record highs, and high mortgage rates make affordability even more of a challenge for buyers.
- The benchmark federal funds rate and 10-year Treasury bonds rate both influence mortgage interest rates.
- Other factors that impact the housing market include inflation, inventory levels and local conditions.
The U.S. housing market is complex. Home prices are driven by a wide variety of factors that can be local, regional, national and even global. While basic concepts like supply-and-demand and inflation come into play, other things, like mortgage interest rates and Fed rates, also have an influence. Here, we’ll break down how rising interest rates are impacting the housing market.
Interest rates and the housing market
Prevailing interest rates have a significant impact on the real estate market. Specifically the federal funds rate, which is a benchmark interest rate determined by the Federal Reserve (often called “the Fed”).
The federal funds rate is the interest rate that banks charge when lending each other money overnight. It’s called a benchmark rate because it serves as a benchmark for many other interest rates: Everything from savings accounts to credit cards have interest rates that are set, in part, based on changes in the federal funds rate.
Bonds also have interest rates that are influenced by the federal funds rate. Historically, the interest rate on 30-year mortgages have moved in tandem with changes in the government’s 10-year Treasury bond rate. In addition to the prevailing mortgage interest rates, the rate you will pay as a homebuyer also depends very heavily on personal factors, like your credit score and the amount of your loan.
While the federal funds rate has an effect on mortgage interest rates, it’s an indirect relationship. For example, as the 10-year bond rate increases, mortgage rates tend to rise. The same is also true for rate decreases.
Mortgage rates
When mortgage rates go up, it increases the monthly mortgage payments for a loan of the same amount. For example, at a 7 percent interest rate, a $250,000 loan would result in principal and interest payments of $1,663 per month. At 6 percent, the same loan would mean payments of just $1,499 per month. The effects are even greater for larger loans.
Thus far in 2025, mortgage rates have hovered close to 7 percent — at the end of April, the 30-year fixed rate averaged 6.81 percent. Compare this to five years ago, at the beginning of the pandemic in 2020, when the average 30-year fixed rate was just 3.38 percent. Today’s much higher rates make it that much more difficult for prospective buyers to afford a home purchase.
It seems unlikely that mortgage rates will plunge in the near future.
— Jeff Ostrowski, Housing Market Analyst, Bankrate
Unfortunately, experts believe that higher rates will stick around for the rest of the year. “It seems unlikely that mortgage rates will plunge in the near future — housing economists expect them to remain above 6 percent,” says Bankrate writer and housing market analyst Jeff Ostrowski.
Inflation and housing
Inflation is another important economic criteria that can fluctuate along with interest rates. As inflation rises, the same amount of money loses purchasing power. The annual U.S. inflation rate is 2.4 percent as of March 2025, according to the Bureau of Labor Statistics’ Consumer Price Index (CPI). That means, in essence, that something that cost $100 12 months ago would cost $102.40 now.
Inflation impacts the housing market in the same way it impacts the cost of retail goods: It contributes to an increase in the price of homes, and in the cost of building materials. In fact, the shelter category of the CPI, which includes housing costs, has been one of the largest contributors to the overall inflation rate for many months.
Housing inventory and new construction
Housing inventory is one of the biggest factors affecting the U.S. housing market right now. When there are fewer houses for people to buy, the homes that are available become a hot commodity, and their prices tend to rise.
Accordingly, the country has been in the throes of a housing shortage for years, and home prices have been hitting record highs. The median price of an existing home has risen year-over-year for 21 straight months, according to March 2025 data from the National Association of Realtors.
The old days of plentiful starter homes are long gone.
— Jeff Ostrowski, Housing Market Analyst, Bankrate
Housing inventory can be impacted by many factors. New construction is a major way to add more supply to the existing housing market. However, new construction can be hampered by rising labor and materials costs, as well as tariffs on materials like lumber and steel. Rising interest rates can slow down construction, as there aren’t as many consumers who can afford the purchase, which limits supply increases in the housing market. Supply-chain issues, as we saw during the height of the pandemic, can also cause problems, as can zoning restrictions.
“Since the Great Recession, home construction volumes have plunged, and that’s contributing to the nationwide housing shortage,” says Ostrowski. “What’s more, many of the new homes being built are at higher price points than in the past. The old days of plentiful starter homes in new developments are long gone.”
Local market factors
Real estate is a very localized business, and location-specific factors can also impact housing prices in many ways. For example, if a major employer in the area shuts down and many people lose their jobs, that can reduce demand for housing in the area and cause prices to fall. Other factors, like the quality of schools, the climate and the proximity to desirable amenities can drive demand up — or down.
Once-hot markets have cooled as prices have hit the limits of affordability.
— Jeff Ostrowski, Housing Market Analyst, Bankrate
In addition to impacting an area’s home prices, the level of supply and demand in a local area also influences whether buyers or sellers have more negotiating power. According to Ostrowski, local housing markets in some areas that saw major growth in recent years are finally slowing down, giving buyers a bit more leverage. “For instance, once-hot markets in Texas and Florida have cooled as prices have hit the limits of affordability,” he says. “In Austin, prices have been soft as a result of a spate of new construction.”
Bottom line
Predicting the future of the real estate market is difficult even for the experts. Some believe that stubbornly high rates and an economic slowdown will force home prices to fall. Others insist that inflation and inadequate housing supply will lead to prices holding steady or continuing to rise. And if the nation does fall into a recession, as many fear, the housing market’s struggles may become even more pronounced.
No matter what happens to the real estate market over the rest of the year, if you’re thinking about buying or selling a home, it’s always a good idea to work with a knowledgeable local real estate agent. A good agent can give you pro insight into your local market and determine a fair price for properties in your area.
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