Fresh off the post-pandemic boom, the housing market has slowed considerably. Not only are fewer homes available for sale, but many potential buyers simply cannot afford or do not want to pay the current offer prices. Older and financially established homeowners who have completely or nearly paid off their mortgages appear loath to take on new debt, especially at the current interest rates.

Let’s dig into the numbers a bit from the Federal Reserve. First off, while rates reached as high as 18 percent in the early 1980s, we have to look back almost a quarter of a century, to April 2002, to find 30-year mortgage rates at the current levels.

Though longer trends offer a useful historical perspective, the short-term changes in interest rates bear much more responsibility for blunting the growth of the housing market. In January 2021, mortgage rates reached a nadir at 2.65 percent. As of August of that year, rates were still at 2.77, attracting both home buyers and homeowners interested in refinancing their current loans. As the graph above shows, the ephemeral low-rate honeymoon shortly gave way to a rapid rise in rates, as the Federal Reserve sought to curtail rising inflation. 

While economists continue to debate the use of rates to achieve this goal, there is little dispute regarding its effects on the housing market. The average 30-year mortgage rate currently stands at 6.93, over four points higher than four years ago at this time. Rates have not dropped to or below 5 percent since August 2022.

Let’s put these rates in perspective. Suppose you bought a home for $625k in January of 2021, put 20 percent down, and took out a fixed rate mortgage at 2.75 percent for $500k (if that’s you, congratulations!). Your monthly payment for just the principal (excluding insurance, property taxes, etc.) is $2,0441. You can use any online calculator to obtain this figure. It’s just a math formula:

Now, suppose you wanted to buy the same home for the same price in January 2025. Nothing has changed about the home, but the interest rates have changed. You now have to pay a 6.75 percent rate. Your monthly payment (again, just for the principal) would be $3,243. That’s an extra $1,200 per month just to cover the interest rate increase. In other words, the rise in interest rates resulted in a monthly payment increase of nearly 60 percent! 

But wait, there’s more. That $625k home in 2021 no longer costs the same. Home prices have risen, which means homebuyers not only feel the punch from interest rates rising, they also feel a second hit from increased home prices. 

Let’s look at the monthly home median price trend from the Federal Reserve.

Zillow provides more updated for the United States here. Overall, Zillow’s data for single-family homes shows an increase of about 34 percent from December 2020 to December 2024. So, that $625k home in January 2021 will cost somewhere around $837k in January 2025 (if you can still find it, that is.) Not only do you have to pay about $42k more down, but you also have to take out a larger loan of about $670k. That’s another increase in the monthly payment.

Take a look at the chart below. This shows how the monthly payment (again, only for principal) varies by loan amount ($300k to $900k) and interest rate (2.5% to 8.5%). To see how this works, let’s focus on the loan we’ve been discussing. The $500k loan at 2.75% meant principal-only monthly payments of $2,041. If the prices had stayed the same, the monthly payment would have risen to $3,243 because of the interest rate rise to 6.75%. Now, let’s say you take out the loan for $650k at that new higher rate, to reflect the rise in home prices. Your new monthly payment is $4,216. 

In short, the monthly payment has now doubled as a result of the interest rate and home price increase double whammy. 

Unfortunately, that’s not all hitting homeowners. The catastrophic fires in Los Angeles (and throughout primarily the western US) have resulted in rising insurance rates if not outright cancellations. In the eastern US, we observe the same phenomenon as hurricanes have battered coastal southern states, reaching even into the North Carolina mountains. While trends suggest the Florida home insurance market has stabilized somewhat, the average Florida property owner pays $2,000 more in insurance costs than the national average. 

What does all this mean? Homeowners are choosing to stay put rather than incur higher interest rates and purchase costs. Those who do sell have a high reservation price (the lowest amount they would accept). This isn’t surprising: a seller who needs to purchase another home wants to extract as much equity from the existing home as possible, particularly to cover the higher costs mentioned above. 

Instead of moving, homeowners are undertaking home renovation projects. Traditionally, improving rather than selling has represented a negative outcome for real estate agents, who earn commissions from home transactions. However, the enterprising real estate agent who has actionable information on the incremental value that such improvements can add to the home, can assist homeowners undertaking such projects in maximizing the value of their renovations. More on that in the next post.