American Housing Continues to Become More Expensive

Over the past several years, the U.S. housing market has faced significant challenges. To combat high inflation in the aftermath of the coronavirus pandemic, the Federal Reserve’s key interest rate remained at peak levels (5.25–5.50%). This led to a marked rise in mortgage rates, prompting prospective homebuyers to put their purchases on hold and wait on the sidelines. A gradual easing of monetary policy began in fall 2024, and by the end of 2025 the key interest rate had fallen to 3.75%. This gave homebuyers hope that rates would fall further in 2026, bringing mortgage rates down with them.

However, the armed conflict in the Middle East has upended those expectations. Fears that a prolonged war with Iran could accelerate inflation and force the U.S. Federal Reserve to raise its key interest rate have triggered a wave of selling in U.S. Treasury securities. In September this year, rates on 30-year fixed-rate mortgages rose above 7%.

It is worth noting that mortgage rates reflect the risks associated with long-term lending. When setting rates on fixed-rate mortgages with 30-year terms, lenders look to the yield on 10-year U.S. Treasury securities. Yields are determined by investor demand, which shifts according to expectations about the country’s future economic conditions, including interest-rate trends, inflation, government borrowing and economic growth. Although the U.S. government also issues 30-year bonds, the yield on 10-year bonds serves as the benchmark for mortgage rates. This is because homeowners typically pay off or refinance their mortgages within 10 years.

Rising mortgage rates push up housing costs and make homes less affordable, as the combination of high borrowing costs and sharply increased home prices significantly curbs buyer activity. Although wage growth in the U.S. has outpaced home-price growth this year, higher mortgage rates have effectively wiped out the benefit that faster income growth would otherwise have provided to prospective buyers.

Record-high home prices and housing costs in the U.S. are compounded by uncertainty in the labor market driven by the development of artificial intelligence, persistent inflation, rising energy prices, growing government borrowing and the ongoing war in Iran. In September this year, the U.S. Federal Reserve was forced to raise its key interest rate by 0.25%. Further rate increases are also possible, as the yield on 10-year U.S. Treasury securities is currently at its highest level in 20 years. All of this is driving up mortgage costs and prompting prospective buyers to postpone their home purchases until conditions improve.

Author: Doctor of Economics, Professor in the Department of World Economy and International Finance at the Financial University under the Government of the Russian Federation, Igor Alekseevich Balyuk.