The limited recovery of the US real estate market, is high interest rates still the main reason?

   Although some economic data show that the US real estate market has shown signs of a slight recovery in early 2025, the overall recovery remains mild and unstable. Many observers point out that although housing transactions and new housing starts have rebounded, they are far from returning to pre-epidemic levels.

The reason why the recovery of the real estate market is so weak is still closely related to the long-term high interest rate level.

Since the Federal Reserve launched an aggressive interest rate hike cycle in 2022, it has maintained the benchmark interest rate at a 20-year high to combat stubborn inflationary pressures. Although core inflation has eased significantly, the federal funds rate has not fallen substantially.

In the first half of 2025, the average interest rate for 30-year mortgages remained in the range of 6.5% to 7%, far higher than the historical low of less than 3% during the epidemic. This interest rate level puts significant pressure on both home buyers and developers.

The surge in home purchase costs directly suppresses demand. For first-time homebuyers, even if house prices do not continue to rise sharply, interest expenses themselves have become a heavy burden.

According to the National Association of Realtors (NAR), in the first quarter of 2025, the average monthly mortgage payment increased by nearly 70% compared to three years ago. This change is reshaping homebuyers' behavior, with more and more families choosing to postpone their home purchase plans and rent or continue to live in existing properties.

At the same time, high interest rates are also suppressing the vitality of the supply side. Although builders' confidence has rebounded, new home starts are still constrained by rising financing costs.

Many small developers face problems such as difficulty in obtaining loans and tight cash flow, resulting in project delays or cancellations. Even in areas around large cities, "affordable housing" projects, which were once seen as having the greatest potential for future growth, have stagnated due to interest rate factors.

Another important factor is the "interest rate lock-in effect." A large number of homeowners locked in low-interest loans between 2% and 3% between 2020 and 2021, and now have little motivation to sell and enter a new mortgage cycle with higher costs.

This has led to extremely tight supply in the second-hand housing market, with listings far below historical averages. The pattern of both supply and demand declines has stabilized prices in local markets, but overall transaction activity remains sluggish.

In addition, the behavior of institutional investors has also changed. In the past few years, a large amount of institutional capital has poured into the residential real estate market, especially in the single-family rental sector, pushing up housing prices and squeezing the space for individual buyers.

However, with rising financing costs and increasing pressure on asset valuations, some large investment institutions have begun to slow down their expansion or even withdraw from some highly leveraged projects. This change has also deprived the market of an important liquidity support before.

Geographically, there is a clear differentiation in the market recovery. Some southern and Midwestern cities have seen a slight improvement in home sales and new construction projects due to factors such as net population inflow and job growth. However, in large coastal cities with high housing prices and high taxes, the recovery signal is still weak or even continues to decline.

Overall, the real estate market is in a stage of structural adjustment rather than a simple cyclical rebound.

From a policy perspective, the Fed's interest rate policy is still the decisive factor. Although the market still has expectations for future interest rate cuts, Fed officials generally expressed caution, emphasizing that they must wait for more evidence to confirm that inflation has been suppressed.

Against the backdrop of long-term high interest rates, it is difficult for the real estate market to gain strong momentum. In addition, fiscal stimulus policies also provide limited direct support to the housing market.

Even if local governments promote housing subsidies or reduce land costs, these measures are often difficult to counter the systemic impact of the national interest rate environment.

Consumer psychology should not be ignored. Under the superposition of high interest rates and economic uncertainty, confidence in buying houses is generally weak.

Survey data show that the proportion of Americans who think "now is a good time to buy a house" remains at a low level in recent years, especially among young homebuyers, and the willingness to buy a house has continued to decline.

This not only affects the current market activity, but also has a potential impact on future population mobility and urban development structure.

It is worth noting that as the basis of mortgage loans and local taxes, the volatility of real estate also brings broader financial and fiscal effects. The exposure of commercial banks to real estate-related assets exposes them to potential risk exposure in a high-interest rate environment.

At the same time, if local governments rely on real estate taxes to maintain a balanced budget, they may also face rising fiscal pressure.

Faced with this background, some analysts believe that the slow recovery of the real estate market in 2025 is a "structural defensive posture" rather than the beginning of a new round of prosperity cycle. The market is more like waiting for a more favorable policy and interest rate turning point.

Before that, both buyers and sellers choose to wait and see cautiously. In the short term, unless the Fed shows a clear path for rate cuts, it is difficult to expect a significant boost in the real estate market.

In the long run, the US real estate market remains resilient, especially against the backdrop of a long-term imbalance between housing supply and demand, as potential demand has not disappeared. But with interest rates remaining high, this demand is being suppressed rather than released.

Only when financing costs fall substantially and market confidence is restored can the housing market truly emerge from the adjustment period and move towards a new growth phase.

In short, the current recovery in the US real estate market remains weak, and high interest rates remain the biggest obstacle. For policymakers, how to balance anti-inflation and maintaining economic vitality will determine whether real estate can once again become an important pillar of economic growth in the next few years.

For market participants, being flexible and choosing points accurately may be more realistic than betting on a full recovery.