Q4 2025 Update: Interest Rates and Housing Prices

In Austin, Texas, where housing costs have been increasing over the long term, one crucial factor is the impact of interest rates on the housing market. Let's break down the complex relationship between interest rates and housing prices to help you understand how it impacts your path to homeownership.

Interest Rates 101:

Interest rates are the cost of borrowing money, and they play a significant role in the real estate market. Here's what you need to know: The Fed Funds rate is set by the Federal Reserve, and this has a derivative effect on mortgage rates. However, the Fed doesn't actually set mortgage rates—banks do. They base their risk tolerance and, consequently, the mortgage rates on their opinion of the market and what they think the Fed will do in the future. If the Fed is keeping monetary policy tight through its purchase of bonds in the open market and maintaining a high overnight rate, banks and corporations tend to be more conservative with their risk tolerance, leading to higher mortgage rates.

Generally speaking, when the economy is strong, interest rates tend to rise, and when it's weak, they tend to fall.

But If the Fed Really Wanted To, They Could Lower Mortgage Rates for Everyday People to Provide Relief, Right?

Nope! While it may sound like a quick fix, it's really not that easy. Mortgage rates are tied to the 10-year U.S. Treasury yield (ticker: TNX), which is set by bond traders buying and selling on the Chicago Mercantile Exchange. Mortgage lenders then offer rates to consumers at a markup above this Treasury yield. This markup, called the "spread," has fluctuated significantly in recent years—spiking to 3% after COVID during times of high uncertainty, then narrowing to about 1.7% more recently.

Here's why this matters: Imagine the Fed lowers interest rates, but bond traders disagree with that decision because inflation data like the CPI still shows prices rising quickly. In that scenario, Treasury yields would stay high despite the Fed's rate cut. Mortgage lenders, seeing continued inflation, would keep mortgage rates elevated too—betting that the Fed will eventually have to raise rates again to get inflation under control.

How Interest Rates Influence Housing Prices

Now that we understand how rates are set, let's look at their impact on housing prices. Generally, when interest rates are low, housing prices go up, and when interest rates rise, they have a dampening effect on housing prices. Here's how this plays out:

Interest Rates and Mortgage Payments: When interest rates are low, borrowing money to buy a home becomes more affordable. Lower rates mean lower monthly mortgage payments. Buyers generally buy a home based on what they can afford monthly. If you keep a buyer's monthly payment static and interest rates rise by 1%, the price of the home would have to come down by 10% to keep that payment the same. This inverse relationship is true at every price point and includes only the mortgage part of a buyer's payment—not property taxes and insurance.

Supply and Demand: Lower interest rates often stimulate demand for housing. When more people can afford to buy homes, the demand for properties goes up. In a market like Austin, this increased demand drove up housing prices between 2020 and 2022. High demand coupled with limited supply led to bidding wars and higher sale prices.

When rates initially rose in 2023, housing prices in Austin came down abruptly. Over 2024 and 2025, the pricing seemed to find its bottom and bounce sideways for a while.

What's Happening in Austin Now?

Now in late 2025, organic buyer demand seems to be increasing. People are having babies, getting married, getting divorced, and retiring—all the life events that organically generate real estate transactions. Year over year, we've seen a 13% increase in sales in the Austin area, though we haven't seen a commensurate increase in average price, likely due to the increased number of options for buyers.

What Do We Expect Going Forward?

Barring an adverse global financial event, we expect modest improvement in the Austin market.

Does this mean you should buy because we think prices will be going up?

NO!

This means if you need a house now, plan on living in it for 3-5 years (or more), and you can afford the monthly payment, then by all means buy. We tell our buyers to always be able to control the market they're buying into. This means never being forced to sell. If you need to move out of town for work, be ready to rent the home out if the market isn't great, or be ready to lock in a loss.

Generally speaking, historically, if buyers purchase and hold onto their home for 5-7 years, the home prices go up—even if there is an adverse market event after they purchase.

Tips for Renters Planning to Buy in Austin

As a renter in Austin, understanding how interest rates impact housing prices is crucial for planning your transition to homeownership:

Budget Wisely: While lower rates can make homeownership more accessible, don't forget to consider all costs involved, including property taxes, insurance, and maintenance. Ensure you're financially prepared for homeownership.

Make It a Habit to Watch Interest Rates: While rates have come down recently, if you buy now, it's a good idea to always watch interest rates and manage that debt wisely. If there's an opportunity to refinance in the future, take advantage of that to lower your monthly payment. If you owe $1,000,000 on a property and you're able to lower your rate by 1%, this could save you $900/month ($450/month for a mortgage of $500,000).

Research the Market: Research the Austin market thoroughly. Understand the neighborhoods you're interested in and monitor property listings. Be ready to act swiftly when you find a suitable home. It's wise to start watching the market long before you're ready to buy. We've started many clients on their search a year or more prior to their actual purchase timeline.

Get Pre-Approved: Before you start your home search, get pre-approved for a mortgage. This not only helps you understand your budget but also strengthens your position when making offers.

Consider Professional Help: As with everything, experts have numerous data points that provide insight into what is expected in any given situation and what is outside the norm. It's always good to work with a professional with experience. I want to work with a CPA who has done well over 300 tax returns, a surgeon who has done over 700 surgeries, and a realtor who has well over 30 transactions a year so that their market knowledge is deep across many situations. (And no…your best friend's cousin who just got their license doesn't have 600 transactions under their belt. 😉)

Thanks for spending this time with us! We are delighted to be your guides to real estate and always happy to nerd out on the details with you!

Jen & the team

Work with an Experienced Agent