Bloomberg’s latest piece on the housing market (“U.S. Real Estate Market: High Prices, Mortgage Rates Hamper Spring Home Selling”) captured the state of the housing market well: prices are high, mortgage rates are punishing, and activity is stuck. Similar headlines point to rates as the problem, but the truth is more nuanced. Deep structural challenges like decades of underbuilding, restrictive zoning, and shifting demographics will take years to untangle. Cutting the Fed Funds rate alone won’t solve those issues, and even rate cuts don’t guarantee relief, as recent Fed cuts have shown mortgage rates can climb if cuts are met with an increase in inflation expectations or reduced future easing.
Still, a meaningful decline in mortgage rates is likely the short-term fix needed, and the Fed has tools to make that happen. Targeted actions such as purchasing mortgage-backed securities or anchoring parts of the Treasury curve could lower borrowing costs, ease the lock-in effect keeping homeowners from selling, and send builders a clear signal that demand will be there when new projects are completed. Rates won’t solve every issue, but they remain the quickest way to unstick a frozen housing market while longer-term solutions take shape.
“Nobody’s buying houses anymore — they’re too expensive.” – Yogi Berra (not really)
In the short term, what matters to buyers is not necessarily the rate itself but the monthly payment that those rates create. The Fed’s zero interest rate policy (ZIRP) first inflated home prices by making mortgage payments historically cheap, but less discussed is how rate hikes has frozen the existing housing market, making it economically irrational for many to give up a sub 3% mortgage to buy a new home financed at a 7% rate (or even rent), which reduces supply and pushes home prices higher.
Aptus Conceptual Illustration*
With resale inventory locked up, new homes should be filling the gap, but they are not. Despite the view by many that builders are failing to respond because of zoning rules, they are not building because they lack confidence that demand will still be there, at viable prices and rates that homeowners can afford, when those homes are completed.
For new buyers, existing supply given a lack of building has created prices that are simply too high. Builders have offered aggressive mortgage buydowns as large as 2-3% but demand has not followed as buyers quickly surmised these buydowns were simply a way for builders to avoid cutting prices. The mortgage payment was still too high.
The Real Barrier Is the Lack of Demand at Current Monthly Payments
It is true that rates alone will not create long-term affordability. We have seen two decades of underbuilding (new construction remains 40% below its prior peak), even in periods when mortgage rates were near historic lows. Builders need long term confidence that demand will be there for the homes they are starting now.
For a generation of would-be first-time buyers, the housing crisis isn’t abstract. It’s defining. Homeownership now feels out of reach, reshaping how many view adulthood, family, and the economy itself. According to the NAHB, nearly 75% of households are priced out, forcing delays in life milestones once considered standard. Affordability isn’t just a challenge; it’s the central issue for an entire generation. This is where rates can be a short-term fix.
Existing Supply Is Stuck. New Supply Is Scared
The “housing shortage” has many roots. Interest rates are part of the story, but so are deep demographic and policy uncertainties:
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- Household formation is slowing, perhaps in part because housing is unaffordable, pushing people to delay or simply not form families with children
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- Birth rates are falling globally, especially in the U.S. among non-immigrants
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- Immigration policy has itself become much more uncertain and restrictive, making it harder to forecast an offset to the domestic population stagnation
Data as of 04.16.2025
Builders commit to multi-year projects. They need to know that when the homes are finished, qualified buyers will be there. That confidence is missing. Other policies could help, including down payment assistance, subsidized mortgage products, or forward purchase commitments from Fannie Mae and Freddie Mac, but they are politically complex and slow to roll out.
Targeted Fed Policy Could Unlock the Market
Rates are not the only problem, but they are the lever that can move the fastest. Targeted Fed action to bring mortgage rates down, through mortgage-backed security purchases, yield curve control, or similar measures, will not erase decades of underbuilding or fix demographics. But it would thaw the lock in effect, lower payments for buyers, and most importantly give builders confidence to start building.
Broader programs to support first-time buyers or backstop builders will take years to design and implement. Fed policy could lower mortgage rates in weeks, creating an almost immediate ripple effect across the market.
A Frozen Market Needs Movement
The housing market is stuck. Builders are waiting. Buyers are priced out.
Rates may not be the only issue, but they can be the short-term solution. If we want the market to thaw, we need more supply. If we want more supply, we need builders to see the demand. Lower rates remain the clearest and fastest way to send that signal.
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This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.
*Conceptual Illustration: Information presented in the above charts are for illustrative purposes only and should not be interpreted as actual performance of any investor’s account. Interest rates assumed are based on generalized approximate values and different levels and times; for example, pre-COVID pandemic levels and current 2025 levels. As these are not actual results and completely assumed, they should not be relied upon for investment decisions. Actual results of individual investors will differ due to many factors, including individual investments and fees, client restrictions, and the timing of investments and cash flows.
Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2507-32.
