What drives the US housing market?

The US housing market looks like a single national story when you read headlines about mortgage rates or home prices, but it behaves more like a three layer system. Land sets the physical boundary of what can be built. Credit sets the monthly payment that households actually feel. Regulation decides where, what, and how quickly supply can respond. When those three layers move in sync, housing feels stable. When they move against each other, you get the modern pattern: prices that refuse to fall dramatically, sales that stay subdued, and affordability that remains tight even when conditions appear to be improving.

Credit is the most visible driver because it rewrites the same purchase price into radically different monthly costs. As of December 11, 2025, the average 30 year fixed mortgage rate in Freddie Mac’s weekly survey was 6.22%. That number is not just a statistic for economists. It is the mechanism that compresses demand, especially for first time buyers who do not have built up equity or a low rate loan to roll forward. At rates in the low sixes, the market does not simply cool. It splits into segments. Cash buyers and higher income households keep moving. Owners with large equity cushions can trade up if they want to absorb the payment shock. Everyone else delays.

This is why it is possible to have a Federal Reserve rate cut and still have buyers complain that mortgage costs are not really coming down. On December 10, 2025, the Fed lowered the target range for the federal funds rate by a quarter point to 3.50% to 3.75%. That matters for short term borrowing and for the broader direction of financial conditions, but mortgage rates are priced off longer term expectations and the bond market’s view of inflation risk. In practice, they tend to move with longer yields rather than tracking the Fed step for step, which is why the same week that Freddie Mac recorded a 6.22% mortgage rate, reporting also pointed to the 10 year Treasury yield sitting around the low 4% range. The market is telling you something simple: housing is not only about policy intent, it is about how investors price time and uncertainty.

The second driver is supply, but not in the casual sense of “there are not enough homes.” The deeper issue is that US supply is slow to respond where demand is strongest, and the reasons are structural. Even when national inventory improves, it can improve in a way that does not reset affordability because it is not improving fast enough, not improving in the right places, or not improving in the segments buyers need most. Realtor.com’s November 2025 housing trends described inventory rising for the 25th straight month, up 12.6% year over year, while also noting that the recovery is plateauing and growth is slowing. That is a useful snapshot of the market’s current balance. More options are appearing, but not at the speed that would make buyers feel like the market has truly reopened.

The National Association of Realtors’ October 2025 existing home sales data helps explain how this plays out on the ground. Sales were running at a 4.1 million seasonally adjusted annual rate, the median existing home sales price was $415,200, and months of supply stood at 4.4. This is not the profile of a market flooded with listings. It is the profile of a market that is slowly thawing, but still constrained enough that prices can stay firm even when transaction volumes remain disappointing.

A major reason supply stays constrained in a higher rate era is what buyers and sellers call “rate lock,” but what is really a household balance sheet incentive. Millions of owners refinanced or bought homes when borrowing costs were far lower. For them, selling is not just a real estate decision, it is a financing decision that can turn a manageable monthly payment into a far higher one for a similar house. When owners choose not to move, they are effectively withholding supply from the market, even if they might otherwise have moved for a job, a growing family, or lifestyle reasons. This creates a quiet but powerful shortage: not a shortage of roofs, but a shortage of willing sellers.

Regulation intensifies this dynamic. In many metros, the binding constraint is not the availability of national capital or the willingness of builders, it is the local political and legal process that governs what can be built and where. Zoning limits, lengthy permitting timelines, neighborhood opposition, and infrastructure bottlenecks make supply “inelastic,” meaning it cannot expand quickly when prices rise. In an elastic market, higher prices trigger new construction, which eventually moderates prices. In an inelastic market, higher prices mostly reallocate who gets to buy and who has to wait. This is why affordability in the US often feels like a policy problem rather than a normal cycle.

The third driver is income and labor market resilience, because affordability is a ratio, not a standalone number. Mortgage rates do not matter in isolation. Prices do not matter in isolation. What matters is whether household cash flow can clear the monthly payment. When employment remains relatively steady, households respond to higher costs by delaying purchases, downsizing expectations, or shifting to cheaper regions rather than exiting the market completely. That supports the idea of a “low volume, sticky price” environment, where the market clears through fewer sales instead of large national price declines.

This stickiness is also reinforced by the psychology of sellers. In a typical downturn, sellers cut prices to move inventory because they have to move. In the post low rate era, many sellers do not have to move. They can stay put with a low locked in payment, or they can list at a price that reflects their view of the market and wait for the right buyer. That reduces urgency, which reduces price flexibility. It also explains why the same housing market can feel dead to first time buyers and yet still look expensive and stable in national indices.

Credit conditions and distress form another layer that is easy to miss when you focus only on averages. Rising financial strain does not hit all borrowers equally. It tends to appear first among households with thinner buffers, among first time buyers who stretched to enter the market, and among those using programs designed to widen access. In November 2025, foreclosure activity rose 21% year over year, according to ATTOM figures reported by Investopedia, with stress concentrated in certain states and metro areas. Foreclosures can add inventory at the margin, but they do not automatically translate into a national supply wave. The timing depends on state processes, and the impact depends on whether the flow is large enough to matter relative to overall inventory. More importantly, rising distress is a sign that the market’s resilience is uneven, with some households absorbing the higher cost regime more painfully than others.

Investors and the rental market also shape demand, even when the story appears to be about owner occupied housing. When high mortgage rates prevent households from buying, many remain renters longer. That can support rents and keep housing costs elevated through a different channel. In turn, strong rental demand can attract investor capital to single family rentals in certain regions, especially where population inflows and job growth look durable. The direction of travel is not always uniform, but the mechanism is consistent: when ownership becomes harder, the value of stable rental cash flows can rise, and that can keep overall housing pressure from easing as much as buyers hope.

Capital flows matter as well, even if they feel abstract compared with a monthly payment. US mortgage rates are partly a story about how investors price long dated risk, including inflation uncertainty. When long term yields stay elevated relative to the near zero era, mortgage backed securities need to offer a return that competes for capital. That can keep mortgage rates “stubborn,” even when the Fed begins easing. It is another reason why housing is not simply a domestic policy story. It sits inside a broader global pricing system for safe assets and duration risk.

Finally, the US market is not one market. It is a national credit framework draped over local realities, and those local realities can diverge sharply. Realtor.com’s November 2025 report noted that the slowdown is most pronounced in parts of the South and West, while many Northeast and Midwest metros still see faster than normal sales due to tighter inventory. That divergence is exactly what you would expect in a constrained supply system. Demand does not disappear evenly. It rotates toward regions that look relatively affordable, toward markets with stable employment bases, and toward places where supply is still tight enough to keep competition alive.

Put together, these drivers explain why “rates will fall” is not a complete forecast for housing. Even if mortgage rates ease from 6.22% over time, affordability can remain strained if prices are already high, if inventory recovery slows, and if existing owners continue to suppress listings because moving forces them to give up a low payment. Housing in 2025 is less about a single lever and more about a system of constraints. Credit sets the speed of the market, supply sets the ceiling on affordability, regulation sets the responsiveness of both, and household balance sheets decide whether the market clears through price declines or through time.

The most useful way to think about what drives the US housing market, then, is to stop looking for one cause and start watching which constraint is binding. When credit is the binding constraint, transactions fall first. When supply is the binding constraint, prices stay sticky. When regulation is the binding constraint, local shortages persist even in a national slowdown. And when incomes become the binding constraint, distress rises at the margins and the market’s inequality becomes more visible. In a system like this, the headline number that matters is not only the mortgage rate or the median price. It is whether the market can actually move, and who is still allowed to move when it does.