Interest rate increases affect housing demand primarily by:

Correct Answer

C) Reducing what a given income can finance

Why this is correct: The governing concept is that housing demand is directly tied to mortgage affordability. An interest rate increase raises the monthly mortgage payment for a given loan amount. For a household with a fixed income, this higher payment means it can qualify for and finance a smaller loan, thereby reducing the maximum home price it can bid. This explains the original point that demand can cool without changes in income or home prices. Why the other choices are wrong: 'Raising property tax assessments' is incorrect because property taxes are based on assessed value and local millage rates, not directly on mortgage interest rates. 'Increasing the cost of new construction' is wrong because while financing costs for builders may rise, this is a supply-side effect on construction costs, not the primary direct impact on housing demand. 'Shortening the typical holding period' is incorrect; higher rates may actually discourage selling and lengthen holding periods if homeowners have low-rate existing mortgages. Exam tip: For demand questions, immediately link 'interest rate' to 'mortgage payment' and 'buyer purchasing power'.