I was recently sent this tweet, which seems like a good jumping off point for a quick overview of the housing market: The first 2 points here are reasonable. Home buying and selling activity are affected by nominal mortgage rates in at least 2 ways. First, when rates are high, they increase the cash outlays required on a conventional mortgage, and so they present a capital constraint for some portion of cash flow-constrained buyers. Second, they create a friction on activity because the odd American norms around mortgage lending mean that when you buy a house with a conventional (fixed rate) mortgage, you are bundling a real asset with a nominal liability that you can’t trade at market value. So, if your bank wants to sell your 3% mortgage to an investor, they will have to take 70 cents on the dollar for it, but if you want to pre-pay it (in effect buying it back from the bank yourself), you have to pay full face value. This is an odd discontinuity which creates friction that affects buying and selling activity.