Key Takeaways
- Mortgage rates have fallen modestly from their peak above 7% in January.
- Analysts expect mortgage rates to hold around 6% in 2026, even as the Fed cuts short-term interest rates.
- Mortgage rates closely track longer-term bond yields, which are being kept elevated by inflation concerns.
Mortgage rates have fallen after peaking above 7% at the beginning of the year, but prospective homebuyers shouldn’t hold their breath for a return to the ultra-low rates seen in the immediate aftermath of the pandemic. The average rate on a new 30-year fixed-rate mortgage is now 6.3%, according to data from Freddie Mac. That’s the lowest level in about a year, but it’s well above the sub-3% lows of 2021.
In the background, the Federal Reserve resumed cutting interest rates in September, with more reductions expected before the end of the year and into 2026. Yet even as short-term rates fall, analysts say mortgage rates—which are more closely tied to long-term bond yields—are likely to remain generally near current levels for the foreseeable future.
“We don’t expect any big changes,” says Nadia Evangelou, senior economist and director of real estate research for the National Association of Realtors. “It’s an adjustment phase,” wherein affordability—the combination of rates, prices, and supply—remains the biggest challenge for potential homebuyers.
Mortgage Rates and the Bond Market
Discussion around interest rates often focuses on the Fed. However, rates that lenders charge on mortgages more closely track the bond market. In particular, mortgage rates are linked to yields on longer-term Treasury bonds, especially 10-year bonds. Those yields are largely driven by investor expectations about inflation and the strength of the economy over the next few years.
Concerns about stubborn inflation in the aftermath of new tariffs and anxiety over a ballooning fiscal deficit have kept longer-term yields elevated this year, though analysts say they have fallen off their highest levels earlier this spring. That trend is likely to persist into 2026.
Meanwhile, the Fed only has a direct influence on very short-term interest rates. Those rates can move in tandem with the rest of the bond market, but there are occasions (like last fall) when the federal-funds rate and longer-term bond yields (and mortgage rates) can diverge.
While the federal-funds rate remained steady through September, the 10-year Treasury yield fell from around 4.7% in January to 4.1% this month. Mortgage rates dropped from 7.0% to 6.3% over the same period.
Some Rate Action Is Priced In
Analysts say the Fed isn’t entirely absent from the picture, however. Some of the decline in mortgages rates in the weeks leading up to the September cut was likely attributable to investor expectations surrounding the path of monetary policy—a familiar pattern. As the market becomes more confident about the Fed’s next move ahead of a likely cut, yields begin to anticipate the move.
“Both the 10-year Treasury yield and the 30-year fixed mortgage rate react before the actual action from the Fed,” says NAR’s Evangelou. “It’s about sentiment.” Mortgage rates also ticked down in the weeks ahead of the Fed’s singular rate cut in 2024. They subsequently shot up from 6.08% in mid-September to highs above 7.00% in the weeks following that meeting, but Evangelou says this year will likely unfold differently. She explains how last year, the economy was still running hot; the labor market was firing on all cylinders and job growth was strong. But in 2025, the labor market is much weaker, which gives the Fed more room to cut interest rates. That may be giving investors confidence that the economy can keep growing, and helping tamp down on volatility in mortgage rates.
“We don’t set mortgage rates, but our policy rate changes do tend to affect mortgage rates,” Federal Reserve Chair Jerome Powell said in a press conference following the central bank’s September policy meeting. “And that has been happening.” The Fed’s twin goals of maximum employment and price stability indicate a strong economy, he said. “That’s a good economy for housing.” However, Powell emphasized that the housing market is subject to affordability and supply challenges that are beyond the Fed’s scope.
Where Are Mortgage Rates Headed?
While mortgage rates are modestly lower than they were at the start of the year, homebuyers shouldn’t expect a return to the rock-bottom rates that turbocharged the housing market in 2020 and 2021. “We think new mortgage rates will still be about 6.000% at the end of 2026, even if the [Fed] eases to 2.875% by then,” wrote Samuel Tombs, chief US economist at Pantheon Macroeconomics, in a client note earlier this month. That would amount to 125 basis points of cuts from today’s target rate range of 4.00%-4.25%.
Earlier this fall, Fannie Mae analysts forecast that the average rate on a 30-year fixed rate mortgage would end 2026 at 5.9%, not much below current levels.
Evangelou adds that future Fed rate reductions are likely baked into today’s rates. “The market has priced in not only the first cut that we expected … but also some of the upcoming rate cuts,” she explains. That’s why she’s not expecting a major drop in mortgage rates any time soon, even as the Fed continues to cut.
Her forecast is for mortgage rates to slowly drop to around 6.2% for the remainder of this year, reflecting “a gradual decline in both policy rates and the term premium.” The term premium is the amount of extra yield investors expect demand in exchange for the risk of locking their money up in a longer-term bond.
Sticky inflation and a resilient economy will offset further declines. Evangelou expects mortgage rates to average about 6% in 2026 and to remain more stable compared with their volatile path over the past few years. A drop in rates from 7% to 6% means more than 5 million additional households will be able to afford to buy a home at the median price, according to NAR data.
Source link
