Mortgage rates influence housing affordability and transactions, and they can affect real-estate stocks through borrowing costs, property values and investor demand. But the impact is not uniform: property-owning equity REITs and mortgage REITs have different business models, and higher rates do not automatically mean lower REIT returns.
How mortgage rates are set—and why the Fed does not set your mortgage rate
The Federal Reserve does not directly choose the interest rate on an individual home loan. Its policy can affect expectations about inflation and future short-term rates. Those expectations, along with market forces, influence longer-term Treasury and mortgage-backed securities yields, which feed into mortgage pricing. The St. Louis Fed explains this connection through the mortgage-backed securities market in its overview of mortgage rates.
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Mortgage rates are therefore related to monetary policy, but they do not move in lockstep with every Fed decision. The link from policy to mortgage pricing runs through financial markets and longer-term yields.
What higher mortgage rates do to housing demand and sales
Affordability and home prices
A higher mortgage rate raises the monthly financing cost of a home purchase, all else equal. That can make homeownership less affordable, reduce the number of buyers able or willing to purchase, and put pressure on housing demand and prices. Lower rates can have the opposite effect by making purchases more affordable and encouraging some homeowners to refinance. The Federal Reserve describes these channels in its explanation of how monetary policy affects the housing market.
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The mortgage-rate lock-in effect
Rates can also constrain the supply of homes for sale. Owners with mortgages originated at lower rates may be reluctant to sell and take on a more expensive loan for their next home. In a Federal Housing Finance Agency working paper examining the period from 2022 Q2 through 2023 Q4, researchers estimated that each one-percentage-point gap between the market mortgage rate and a homeowner’s origination rate reduced that homeowner’s probability of sale by 18.1%. The paper estimated that lock-in prevented 1.33 million sales during that defined period. These are historical study estimates, not universal effects or a forecast for current housing activity. See the FHFA paper on the impact of mortgage-rate lock-in on housing turnover.
As a result, higher mortgage rates can weigh on buyer demand while also discouraging some existing owners from listing. The number of transactions depends on both sides of that market, not just how many buyers can afford a loan.
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Why REITs respond differently from home sales
Real estate investment trusts (REITs) are not one uniform type of investment. The first question to ask is whether a REIT owns properties or finances real estate.
Equity REITs own or operate property
Equity REITs own or operate income-producing properties. Their results depend on property-level fundamentals such as occupancy, rents, operating costs and the ability to acquire or finance assets. Higher borrowing costs can make acquisitions and refinancing more expensive, while higher market yields can make competing income investments more appealing to investors. Higher rates can also put pressure on property valuations.
Those pressures can be offset when economic conditions are strong enough to support occupancy and rent growth. Better property operations can help support net operating income (NOI), funds from operations (FFO) and, depending on the REIT’s finances and dividend policy, distributions to shareholders.
Mortgage REITs hold or finance mortgages
Mortgage REITs finance real-estate owners or hold mortgages and mortgage-backed securities rather than relying primarily on rents from properties they own. Their performance can be sensitive to funding costs, asset yields, credit conditions and the value of their mortgage holdings. The SEC notes that mortgage REITs tend to be more leveraged than property-focused REITs and may use derivatives or other hedging techniques to manage interest-rate and credit risks. Leverage and hedging can make their risk profile distinct; the details depend on the issuer.
The SEC’s REIT investor bulletin also notes that the effects of rates vary: some REITs may benefit when rents or mortgage rates rise, while others may face higher acquisition costs. Interest-bearing alternatives can make REIT dividend yields less attractive to investors.
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1Scan for outdated or missing drivers - takes under a minute2Clear out junk files and repair common Windows errors3Fix the driver behind crashes, sound loss and screen glitchesDo rising rates always make REIT shares fall?
No. Interest rates matter, but they are only one influence on REIT returns. Rates can rise because inflation expectations or market yields have changed, but they can also rise alongside economic conditions that support tenant demand, occupancy and rent growth. Property operations, debt structure, valuation and investor alternatives all affect how a particular REIT responds.
Nareit’s historical analysis found that equity REITs recorded positive total returns in 78% of months when 10-year Treasury yields rose, across its sample from Q1 1992 through Q2 2025. This is a result for that historical sample, not evidence that any specific REIT will gain when yields rise or a prediction of future performance. Nareit’s discussion, “REITs and Interest Rates,” notes that REIT share prices, like the broader stock market, often respond to changes in the outlook for both short-term rates influenced by Federal Reserve policy and longer-term rates shaped more by market forces.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How to assess a REIT’s exposure to mortgage rates
When comparing REITs, look beyond the headline rate environment. A practical review starts with the business model and then checks the issuer’s filings for financing and operating details.
- Business model: Identify whether the REIT is an equity REIT or a mortgage REIT. For an equity REIT, note its property sector; for a mortgage REIT, examine the types of loans or mortgage-backed securities it holds.
- Debt structure: Review whether borrowings are fixed-rate or floating-rate, when they mature, and how much refinancing may be needed. These details help show how quickly higher rates could affect financing costs.
- Leverage and hedging: Check the issuer’s leverage and disclosed hedging approach, especially for mortgage REITs. Hedging can manage certain risks but does not make exposure disappear.
- Property operations: For equity REITs, examine occupancy, rent growth, NOI and FFO alongside acquisition and refinancing needs. These measures help distinguish rate pressure from changes in the underlying business.
- Valuation and income: Consider the share valuation and dividend yield in relation to the REIT’s prospects and the yields available on other income investments. A higher yield alone does not establish that a REIT is undervalued or low risk.
- Issuer-specific risks: Read current company filings for debt, liquidity, credit and operating risks. The broad label “REIT” is not a substitute for understanding a company’s disclosures.
What mortgage rates can—and cannot—tell an investor
Mortgage rates offer useful context for housing affordability and financing conditions, but they are not a stand-alone signal for buying or selling real-estate stocks. Higher rates can reduce buyer demand, slow transactions and increase costs for property owners and real-estate lenders. At the same time, limited listings, resilient rents or stronger property operations can change the effect on individual businesses. Equity REITs and mortgage REITs also have different sources of income and risk.
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For an investment decision, connect the rate outlook to the specific REIT’s property or mortgage holdings, balance sheet, operations, valuation and disclosures rather than assuming that all real-estate stocks move together.
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