What is the biggest influence on home prices in the US?

The biggest influence on home prices in the US is the cost of mortgage credit and its transmission through a market defined by chronic supply rigidity. The headline variable is the 30-year mortgage rate, which is itself a function of the Federal Reserve’s policy stance, the term premium embedded in long-dated Treasuries, and the liquidity and risk appetite in the mortgage-backed securities market. The reason this channel dominates is simple. US housing is uniquely financialized through long-duration, fixed-rate mortgages that set the marginal buyer’s purchasing power. When the price of that credit moves, buyer capacity re-prices across the nation within weeks. Where supply is slow to respond because of zoning or labor bottlenecks, prices absorb the shock. Where supply can flex, volumes absorb more of it.

This is not only about posted policy rates. It is about how policy and balance sheet choices translate into primary mortgage pricing. When the central bank tightens and allows its portfolio of mortgage-backed securities to run off, secondary market demand thins, spreads widen over Treasuries, and lenders pass that cost through to borrowers. The reverse is also true. In periods of accommodation, the compression of MBS spreads and lower Treasury yields pull mortgage coupons down, which lifts the present value of housing services and increases willingness to pay. In the US, with a deep securitization channel that shapes lender funding costs, this pipeline is the fulcrum on which price cycles turn.

Supply constraints do not disappear in this story. They determine the elasticity of local price responses. A city with strict land use rules, elongated approval timelines, and persistent labor or materials shortages cannot add homes quickly when mortgage rates fall. The result is a larger price response to the same credit impulse. In contrast, markets with more permissive planning and more available buildable land will see a larger share of the impulse show up in construction volumes and less in price. This is why the same national credit shock produces different local outcomes. Mortgage rates set the national tide. Zoning and build-out capacity decide whether that tide becomes a price surge or a building wave.

Demographics matter as well, but even demographic pressure expresses itself through credit cost. A large cohort entering prime home-buying age can increase demand, but the actual price they can pay is governed by monthly payment feasibility. When the mortgage rate resets higher, the same household income supports a smaller principal. That purchasing power math disciplines bidding behavior across cohorts. The credit lever can overwhelm near-term demographic tails when it moves with conviction, which is why rate cycles often reprice markets faster than population trends can counter.

The post-2008 period offers a clear illustration of the credit channel’s primacy. As policy rates fell and the central bank accumulated MBS, mortgage rates declined and refinancing waves followed. In markets with tight supply and strong job growth, prices recovered first and strongest. The underlying driver was cheaper, more available credit transmitted through a stabilized banking system and a supported securitization market. Later, when policy normalized and balance sheet support receded, mortgage rates climbed. Transaction volumes adjusted down immediately. Prices lagged but eventually reflected the new cost of capital, especially where resale inventory could not clear at prior valuations.

It is tempting to argue that construction costs drive prices. They do set a floor for new supply economics, particularly for single-family builds where materials and labor share are meaningful. Yet cost curves are not the primary marginal price setter for the existing home stock, which represents the majority of transactions. Sellers with legacy low-rate mortgages have a strong lock-in incentive that restricts listing supply when rates rise. That makes credit conditions even more decisive. When owners do not list, the market becomes dominated by buyers forced to compete over thin inventory or step out altogether. In either case, the monthly payment constraint imposed by mortgage rates is still the key binding force.

Investor activity often enters the narrative as a separate driver. It is better understood as an amplifier of the same credit cycle. Institutional and small investor buyers are sensitive to financing rates and cap rate spreads over funding costs. When the credit channel is accommodative, leveraged buyers can underwrite more assets. When it tightens, they retreat or demand a lower entry price. The behavior is cyclical and anchored to the same rate structure that governs owner-occupier affordability. Investors can shape local competition, but they rarely override the national price cycle set by mortgage rate transmission.

Regional labor markets and income growth are important for medium-term sustainability of valuations, but the near-term direction of prices aligns with shifts in financing cost. Wage gains can offset some affordability pressure, yet the arithmetic remains stubborn. A one percentage point move in the mortgage rate can reprice the present value of a given monthly payment by double-digit percentages. Few regional wage cycles can keep pace with that kind of financial re-rating in the short run. Over time, incomes and migration flows will redistribute demand across metros. In the moment, the lever that moves the entire curve is the rate at which households can borrow.

The US mortgage market’s structural features magnify this effect. Fixed-rate, long-amortization loans reduce interest rate risk for households but leave entry affordability highly sensitive to the prevailing rate at origination. Prepayment options reshape servicer economics and investor duration, which in turn affect spreads and the willingness of capital to hold mortgage risk. Because loan production depends on take-out in securitization or portfolio capacity at depositories, any deterioration in MBS liquidity or bank balance sheet appetite feeds directly into primary rates. This is not a side detail. It is the mechanism by which macro policy decisions become neighborhood price quotes.

Historical comparisons reinforce the point. In periods where inflation risk pushed term premiums higher, mortgage rates rose even without large changes in the policy rate. Prices cooled because the primary constraint on buyer capacity is the integrated cost of funds, not only the overnight rate. Conversely, episodes of aggressive easing compressed both the risk-free curve and mortgage spreads, lifting demand capacity rapidly. Where local regulation prevented supply from responding, valuations expanded. Where policy reforms enabled more density or streamlined approvals, supply took more of the adjustment and moderated price inflation.

What about land scarcity as a fundamental driver. Scarcity sets the long-run gradient of price levels across cities, but it does not deliver the cyclical motion that households and policymakers feel quarter to quarter. That motion is produced when financing cost shifts against an inelastic supply surface. A high-scarcity market with stable rates does not experience the same volatility as a high-scarcity market hit by a rapid repricing of credit. The largest swings arrive when elevated scarcity meets a sharp credit impulse. The variable that changed was the mortgage rate.

Policy makers who focus only on rate levels miss the supply side of transmission. Easing without reform can reflate valuations in constrained markets without meaningfully improving housing access. Tightening without complementary supply measures can reduce transaction activity while keeping prices sticky because lock-in suppresses listings. The sequencing matters. If authorities aim to stabilize housing costs for households, they must treat zoning flexibility, permitting timelines, and labor pipeline programs as co-levers that condition how rate policy shows up in prices. The credit lever is first, but its effects can be softened or sharpened by supply policy.

There is also a distributional angle. First-time buyers absorb the full force of higher financing costs. Existing owners with low-rate loans are insulated, which creates a two-tier market where mobility is impaired. As rates fall, this mobility freeze can thaw, increasing active listings and moderating price pressure. As rates rise, the freeze can intensify, concentrating activity in new construction or in segments where buyers have less reliance on debt. In each case the organizing force is still the cost of mortgage credit, with supply institutions and household balance sheets determining how it propagates.

The phrase biggest influence on home prices in the US captures a complex system in a single line. The accurate reading is that the mortgage rate, shaped by policy and market risk compensation, sets the national direction. Everything else tells you how far and how unevenly that direction will travel. For practitioners, the practical implication is clear. Watch the policy stance, the Treasury curve, and the MBS basis to understand near-term pricing pressure. Then overlay supply elasticity to judge local outcomes. The long run will always favor markets that can add units responsibly. The next four quarters will belong to the cost of funds.

What this signals is not mysterious. Price cycles will continue to hinge on a credit channel that is both sensitive to policy and conditioned by structural supply choices. Attempts to engineer affordability through rates alone will fatigue. Interventions that expand buildable capacity and reduce frictions in delivery will determine whether the next period of easing produces access or merely higher appraisals. The posture may look flexible on the surface, but the signaling stays consistent. Credit moves first. Supply decides the collateral effects.