How do high interest rates affect the housing market?
High interest rates can have a number of effects on the housing market, including your ability to get approved for a mortgage loan, the supply of homes on the market and home prices in general.
Increased rates decrease buying power
Rising mortgage rates can have a significant impact on buying power. For instance, even a small increase in rates can add hundreds of dollars to a monthly payment and make it difficult to qualify for a loan in the first place. As a result, you might be forced to purchase a less expensive home or wait until rates drop before entering the market.
Finding a home in a lower price range means you might have to compromise and look at homes in a less-desirable neighborhood, in need of repairs or upgrades, smaller than you planned for or without the amenities you want.
If you don’t want to compromise, you can wait until the market shifts while working on your qualifications as a borrower. For example, you might try to come up with more money for a down payment, increase your credit score or improve your debt-to-income (DTI) ratio to qualify for a better mortgage.
Less demand and lower home prices
When fewer people can afford a mortgage because of high rates, it can lead to a reduction in the demand for homes and a shift in the price of real estate.
“Homes become more expensive for buyers, and that begins to change the housing market from a seller’s landscape to the buyer’s,” said Brad Cahoone, CEO of Global Home Finance, a mortgage broker serving six states across the U.S. “Buyers become pickier, take longer to make decisions, and these actions ultimately reduce demand.”
In turn, sellers might need to adjust their price expectations.
“Home sellers, at some point in the buyer’s market, will need to reduce their listing prices to attract qualified buyers,” explained Cahoone. “It doesn't happen overnight, but it will happen. There is always an ebb and flow between home seller’s and buyer’s markets [as] supply and demand move up and down.”
The changes in sellers’ expectations due to reduced demand can benefit buyers who are able to afford a mortgage even with the higher interest rates.
As interest rates have increased and buyer demand has cooled, competitive offers no longer need to be entirely non-contingent, which provides additional protection for people purchasing property.”
“Reduced demand means less competition, which can create opportunities for buyers that were previously unable to get into contract due to excessive competition,” said Megan Micco, a mortgage broker for Compass, a real estate brokerage, in Berkeley, Calif. “As interest rates have increased and buyer demand has cooled, competitive offers no longer need to be entirely non-contingent, which provides additional protection for people purchasing property.”
However, when interest rates are at all-time lows, sellers can often choose from several offers, and many buyers begin to make non-contingent or all-cash offers.
How are interest rates set?
Many things make up a mortgage interest rate — some are within a borrower’s control, and some depend on the lender and the overall economy. Factors that go into determining mortgage rates include:
- Inflation
- Federal Reserve rates
- Overall economic conditions
- Origination costs
- The borrower’s finances
- The property’s price and location
» MORE: Mortgage APR vs. interest rate
How does a 1% rate increase affect what you can afford?
A 1% rate increase might seem minor, but this small increase in your monthly payment can add up over time and affect your buying power.
The table below shows the difference in buying power for mortgages with rates between 4% and 5%. Even when the monthly payment is the same, the maximum price of a home the borrower can afford goes down significantly when the interest rate increases slightly.
| Interest rate | Maximum home price | Buying power difference vs. 4% | Monthly payment |
|---|---|---|---|
| 4% | $424,159 | $0 | $1,620 |
| 4.25% | $411,636 | -$12.523 | $1,620 |
| 4.5% | $399,656 | -$24,503 | $1,620 |
| 4.75% | $388,194 | -$35,965 | $1,620 |
| 5% | $377,220 | -$46,939 | $1,620 |
For example, if you look at a borrower with a monthly income of $4,500 and a debt-to-income ratio of 36% who makes a 20% down payment, even a quarter of a percent rate increase can mean they’ll be able to afford roughly $12,000 less over the course of a fixed, 30-year mortgage. With a 1% increase, the price of a home they can afford drops by more than $45,000.
» MORE: Mortgage rate lock: how and when to lock in your mortgage rate
FAQ
What happens to my buying power if the Fed raises rates?
If the Federal Reserve increases the federal funds rate — or the benchmark interest rate, which is the rate that banks charge each other for borrowing overnight — it’s possible mortgage rates may slightly increase. Although Federal Reserve rate changes don’t directly impact mortgage rates, they can influence the rates that lenders set. So, if the Fed increases rates, mortgage rates may follow, and it’s possible your buying power will be reduced.
Is it worth buying a house when interest rates are high?
It can be worth buying a house when interest rates are high if you’re in a good financial situation and you have enough money for a down payment and other costs. If rates decrease at a later date, you could refinance and receive a lower rate.
Who benefits the most from interest rate cuts?
People and businesses who are interested in borrowing tend to benefit the most from interest rate cuts since variable interest rates decrease whenever the benchmark interest rate is cut.
Bottom line: Is now a good time to buy a house?
Mortgage interest rates change daily, and picking the right time to buy a house depends in large part on your personal financial situation. Overall, if you can afford a mortgage with current interest rates and you find a good deal on a house, now can be a good time to buy a house. If the house you want is outside of your budget because of your current finances and the market today, it might be a better idea to wait until rates decrease or save up more money to increase your down payment. You may also consider an adjustable-rate mortgage (ARM) for a lower initial rate or buying now and refinancing if rates drop.
Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- Federal Reserve Bank of St. Louis, “30-Year Fixed Rate Mortgage Average in the United States.” Accessed on Nov. 7, 2025.
- Freddie Mac, “Mortgage Rates.” Accessed on Nov. 7, 2025.
