Persistently high mortgage rates combined with lofty home prices serve as headwinds to housing market activity. Sales of existing homes remain well below normal pre-pandemic levels. At the same time, new policy initiatives may create challenges for the home construction industry.
“The supply of existing homes on the market is low,” says Tom Hainlin, national investment strategist at U.S. Bank Asset Management Group. “It remains a function of current homeowners unwilling to trade their lower-rate existing mortgage for a higher-cost new mortgage.” Over the last 18 months, the average 30-year mortgage rate, which was near 3% at the end of 2021, has fluctuated mostly between 6% and 7%.
Mortgage rates generally follow the trend of U.S. 10-year Treasury notes. Notably, the yield spread between 30-year mortgages and 10-year Treasuries remains high. “Today’s mortgage rates reflect yields, but also a relatively wide premium between 10-year U.S. Treasury notes and mortgage rates,” says Rob Haworth, senior investment strategy director at U.S. Bank Asset Management Group.
The relatively wide yield spread indicates investors aren’t flocking to the mortgage debt securities market. In addition, notes Haworth, the federal reserve continues reducing its holdings of mortgage-backed securities, requiring other buyers to step up. Lacking higher demand, mortgage yields are likely to stay higher for longer.
After declining modestly at the end of 2024, home prices are up 2.75% through April 2025. Home prices in the current decade gained more than 56%, although the pace of increase recently slowed. As the chart below indicates, the median home price with a 20% down payment requires over a full year of household income and monthly mortgage payments that are 35% of household income for the median earner.
“While current home sales are slower than usual, it seems strong housing demand still exists,” says Haworth. “Solid demand is keeping home prices high despite deteriorating affordability.” The median monthly mortgage payment in June 2025 (based on average 30-year mortgage rates and home prices) was $2,820, a drop from May’s record high.
After showing some positive signs in early 2025, existing home sales can best be described as sluggish. According to the National Association of Realtors, May existing home sales were less than 1% higher than April’s sales. Disappointingly, home sales were 0.7% below the May 2024 level, representing the slowest activity level during the month of May in 16 years.
May’s sales rate amounts to 4.03 million in annualized existing home sales. “Historically, annual existing home sales average more than 5 million,” says Hainlin. The rate was as high as 4.29 million in December but has fallen since.
Haworth notes that the annualized home sales rate underrepresents the number of potential buyers bidding on homes. “We’re undersupplied on existing home inventory, and bidders have to chase existing supply,” says Haworth.
Recently, new home construction experienced better results. In April, sales of new single-family houses rose to an annualized rate of 743,000, an 11% increase from March sales and 3.3% higher than the same month in 2024. While the numbers are encouraging, it’s unclear whether the sales momentum can be sustained.
“Any change to the three major inputs, material costs, labor costs , and borrowing costs, will influence builder confidence,” says Hainlin. “Builders need to feel confident they can price homes appropriately given those cost inputs.”
A growing concern are potential construction cost trends. “The U.S. only meets about 70% of its housing lumber demand, with 80% of imports to close the demand gap coming from Canada, ” says Haworth. President Donald Trump’s implementation of higher tariffs on foreign goods could lead to increased lumber prices. “Prices of other construction components such as copper and steel have also risen, adding to costs,” notes Haworth.
