Do We Need to Rethink 2024 Mortgage Rate Forecasts?

The mortgage rate landscape in 2025 continues to challenge conventional wisdom, forcing homebuyers, sellers, and industry professionals to recalibrate their expectations. After Federal Reserve rate cuts in late 2024 failed to deliver the dramatic mortgage rate declines many anticipated, the market has settled into a “higher for longer” reality that demands a fresh perspective on home financing strategy.

According to Fannie Mae’s latest Economic and Strategic Research forecast (September 2025), 30-year fixed mortgage rates are expected to end 2025 at 6.4% and gradually decline to 5.9% by the end of 2026, a more modest trajectory than earlier predictions suggested. This revised outlook reflects persistent inflation pressures, a resilient economy, and the Federal Reserve’s cautious approach to monetary policy easing.

For prospective homebuyers and real estate investors, understanding why these forecasts continue evolving (and what factors could alter them further) is essential for making informed decisions in today’s market.

The Current Mortgage Rate Environment (September 2025)

Where Rates Stand Today

As of late September 2025, the average 30-year fixed mortgage rate hovers around 6.3%, according to Freddie Mac data. This represents:

• 36 consecutive weeks below 7% following the volatility of 2023-2024
• A gradual decline from early 2025 highs near 6.8-7.0%
• Rates still significantly above pandemic-era lows of 2.5-3.5%
• Approximately double the rates that 83% of current homeowners locked in

The “Rate Lock-In” Effect: With the average interest rate on existing mortgages at just 4.3% nationally, millions of homeowners remain trapped in their current homes, unwilling to give up favorable rates for today’s higher borrowing costs. This phenomenon continues suppressing housing inventory and market activity heading into late 2025.

Federal Reserve Policy Update

The Federal Reserve’s approach to monetary policy remains the primary driver of mortgage rate expectations:

Recent Fed Actions:

• September 2025: Fed cut rates by 0.25% to a target range of 4.25-4.5%
• 2024 trajectory: Three rate cuts totaling 1.00% in the second half
• 2025 YTD: Held rates steady through first five meetings before September cut
• Current stance: Data-dependent with balanced risks to dual mandate

According to the Federal Reserve’s September 2025 projections, policymakers anticipate continued gradual easing, though the pace remains uncertain given persistent inflation concerns and labor market dynamics.

Fed Chair Jerome Powell’s Assessment: The September rate cut was characterized as a “risk management cut” acknowledging:

• Labor market softening (unemployment at 4.2%)
• Growth expectations remaining positive despite slowdown
• Inflation progress but still above 2% target
• Tariff impacts less severe than feared but ongoing concern

Major Mortgage Rate Forecasts for 2025-2026

Fannie Mae Economic and Strategic Research Group

September 2025 Forecast:

• End of 2025: 6.4% (30-year fixed)
• End of 2026: 5.9% (30-year fixed)
• Trend: Gradual decline with rates staying above 6% through 2025

Key Economic Assumptions:

• GDP Growth: 1.1% (2025), 2.2% (2026) on Q4/Q4 basis
• CPI Inflation: 3.3% (end of 2025), 2.6% (end of 2026)
• Unemployment: Rising modestly from current levels
• Home Sales: 4.72 million (2025), 5.16 million (2026)

Fannie Mae Chief Economist Mark Palim’s Perspective: “While our latest forecast calls for a period of modestly slower economic growth, historically, interest rates have been the most important driver of home sales. We think mortgage rates will move even lower within the next quarter and ultimately close the year at approximately 6.3 percent, which could be low enough to generate some extra sales from any would-be buyers still waiting on the sidelines.”

National Association of Realtors® (NAR)

2025-2026 Projection:

• 2025 Average: 6.7%
• 2026 Average: 6.0%
• Home Price Growth: 1% (2025), 4% (2026)

NAR’s forecast reflects expectations that rates will remain elevated through 2025 before declining more meaningfully in 2026 as inflation moderates and the Fed continues easing policy.

National Association of Home Builders (NAHB)

Forecast:

• 2025 Average: 6.74%
• 2026 Average: 6.32%
• 2027 Average: 6.0%

NAHB emphasizes that with inflation running above the Federal Reserve’s 2% target, interest rates will remain elevated longer than earlier predictions suggested, particularly given ongoing tariff concerns and their potential inflationary impact.

Mortgage Bankers Association (MBA)

Conservative Outlook: The MBA maintains a more cautious forecast, projecting rates will remain in the mid-6% range through much of 2025, with only gradual improvement into 2026. Their analysis emphasizes:

• Persistent core inflation pressures
• Federal Reserve’s data-dependent approach
• Ongoing labor market strength supporting higher rates
• Limited Fed flexibility given inflation risks

What’s Driving the Higher-for-Longer Reality?

1. Persistent Inflation Above Fed Target

Despite progress from 2022-2023 peaks, inflation remains stubbornly above the Federal Reserve’s 2% target:

Current Inflation Metrics (August 2025):

• Overall CPI: 2.9% year-over-year (per BLS August data)
• Core CPI (excluding food/energy): 3.1% year-over-year
• Fed’s PCE target: Still trending above 2%

Why This Matters for Mortgage Rates: The Federal Reserve cannot aggressively cut rates while inflation remains elevated without risking a resurgence of price pressures. As Fed Chair Powell noted, “to the consumer, the pass through [of tariffs] has been pretty small,” but companies intend to pass along more cost increases, suggesting inflation may remain sticky.

Energy and Geopolitical Factors: Unlike 2024’s inflation improvement, which was partially driven by energy price declines, current global instability makes sustained energy cost reductions less certain. Any significant oil price increases could quickly reverse inflation progress and delay rate cuts.

2. Resilient Economic Growth

The U.S. economy continues demonstrating unexpected strength despite higher interest rates:

Economic Indicators:

• GDP Growth: Q2 2025 rebounded 3.0% after softer Q1
• Consumer Spending: Remained solid despite high borrowing costs
• Labor Market: Unemployment at 4.2%, still historically low
• Business Investment: Continued expansion in key sectors

The Fed’s Challenge: A strong economy reduces urgency for aggressive rate cuts. The Federal Reserve must balance supporting growth with controlling inflation, a delicate equilibrium that favors gradual policy adjustments rather than dramatic moves.

3. Federal Reserve’s Cautious Approach

The Fed learned painful lessons from premature declarations of “transitory” inflation in 2021-2022. Current policy reflects this experience:

Data-Dependent Framework:

• Each decision based on incoming economic data
• No predetermined path for rate cuts
• Willingness to pause or reverse course if necessary
• Focus on sustainable 2% inflation before aggressive easing

Market Expectations vs. Fed Signals: Financial markets consistently price in more aggressive rate cuts than the Fed delivers, creating ongoing recalibration in rate forecasts. This pattern persisted through 2024 and continues in 2025.

4. Housing Market Supply-Demand Dynamics

Unique housing market conditions influence mortgage rate trajectories:

The Lock-In Effect:

• 83% of homeowners have rates below 6%
• Many with rates below 4% or even 3%
• Reluctance to sell suppresses inventory
• Limited supply supports home prices despite higher rates

New Construction: Builders continue adding supply but cannot fully offset the inventory deficit created by existing homeowners staying put. This unusual dynamic means higher mortgage rates haven’t crashed home prices as historical patterns might suggest.

Scenarios That Could Change Forecasts

Optimistic Scenario: Faster Rate Declines

Conditions Required:

• Inflation drops sharply toward 2% target
• Unemployment rises significantly (recession risk)
• Economic growth slows more than expected
• No major geopolitical shocks to energy prices

Potential Outcome:

• Mortgage rates could fall to 5.5-6.0% by end of 2025
• Fed cuts more aggressively (0.50% increments)
• Housing market activity increases substantially

Probability Assessment: 20-25%

While possible, this scenario requires significant economic softening that hasn’t materialized despite higher rates persisting for over a year.

Pessimistic Scenario: Rates Stay Elevated or Rise

Conditions Required:

• Inflation reaccelerates (tariffs, energy shocks)
• Economy proves more resilient than expected
• Fed pauses or reverses rate cuts
• Long-term inflation expectations rise

Potential Outcome:

• Mortgage rates remain 6.5-7.0% through 2025
• Limited improvement in 2026
• Housing market remains constrained
• Home prices stabilize or decline modestly

Probability Assessment: 25-30%

This scenario grows more likely if energy prices surge or tariff impacts exceed current expectations. Geopolitical instability remains a wild card.

Base Case: Gradual Decline (Current Consensus)

Expected Path:

• Rates end 2025 at 6.3-6.5%
• Gradual decline to 5.9-6.1% by end 2026
• Fed continues measured cuts (0.25% at a time)
• Inflation slowly approaches 2% without recession

Probability Assessment: 45-50%

This represents the current consensus reflected in Fannie Mae and other major forecasts, modest improvement but no dramatic relief for homebuyers.

What This Means for Different Market Participants

For Homebuyers

Strategic Considerations:

Waiting for Lower Rates:

• The Risk: Rates may not fall significantly soon
• The Trade-Off: Home prices likely appreciate while waiting
• The Calculation: Is the monthly payment difference worth the price increase?

Example: $400,000 home at 6.5% = $2,528/month (P&I) $420,000 home (5% appreciation) at 6.0% = $2,518/month

If prices rise 5% while rates fall 0.5%, the monthly payment remains virtually unchanged.

Buying Now:

• Lock in today’s prices before further appreciation
• Opportunity to refinance when rates eventually drop
• Build equity immediately rather than paying rent
• More negotiating power in today’s balanced market

The “Refinance Later” Strategy: Many buyers are purchasing now with plans to refinance when rates decline. This works if:

• You can afford current payments comfortably
• You plan to stay in the home long-term (5+ years)
• You have cash reserves for refinancing costs
• You’re not stretching to maximum affordability

For Sellers

Market Dynamics:

Inventory Challenges:

• Limited supply continues supporting prices
• Your “golden handcuffs” are shared by potential buyers
• Serious buyers today are motivated despite rates

Pricing Strategy:

• Price competitively to attract committed buyers
• Consider rate buy-downs or seller concessions
• Emphasize property features that justify premium

Timing Considerations:

• Spring 2026 may see increased activity if rates decline
• Competition from other sellers could increase
• Current market favors quality properties priced right

For Real Estate Investors

Investment Analysis:

Higher Rates Change Calculations:

• Cap rates must be higher to generate positive cash flow
• Focus on value-add opportunities with forced appreciation
• Consider alternative financing (seller financing, creative structures)
• Evaluate deals with current rates, not hoped-for refinancing

Market Opportunities:

• Motivated sellers willing to negotiate terms
• Less competition from rate-sensitive buyers
• Potential to assume existing low-rate mortgages
• Commercial property opportunities as values adjust

Strategy Adjustments:

• Longer hold periods before refinancing possible
• More conservative underwriting essential
• Higher down payments may be necessary
• Focus on cash-flowing properties from day one

For Homeowners Considering Refinancing

The Reality Check:

When Refinancing Makes Sense:

• Current rate is 7.5%+ (at least 1.0% above today’s rates)
• Significant loan balance remaining (not near payoff)
• Planning to stay in home long enough to recoup costs
• Can reduce payment by at least $200-300/month

The Waiting Game: For homeowners with rates below 6%, refinancing makes little sense until rates drop to 5.5% or lower, which may not occur until 2026 or later based on current forecasts.

Expert Perspectives on the Forecast Evolution

Why Forecasts Keep Getting Revised

The Challenge of Economic Forecasting: As Fed Chair Jerome Powell acknowledged: “Forecasts are highly uncertain. Forecasting is very difficult. Forecasters are a humble lot with much to be humble about.”

Several factors make 2025 forecasts particularly challenging:

1. Unprecedented Post-Pandemic Economics: The economy doesn’t follow historical patterns after massive fiscal stimulus, supply chain disruptions, and rapid rate increases.

2. Policy Uncertainty: Tariff policies, government spending, and regulatory changes create unpredictable variables affecting inflation and growth.

3. Global Instability: Geopolitical events (from Middle East tensions to Eastern European conflicts) can rapidly alter energy prices and inflation expectations.

4. Labor Market Complexity: The relationship between unemployment and inflation appears different post-pandemic, complicating Fed decision-making.

What This Means for Forecast Credibility

Key Takeaway: Forecasts provide directional guidance but shouldn’t be treated as guarantees. The range of possible outcomes remains wide.

How to Use Forecasts:

• Plan for the base case but prepare for alternatives
• Monitor leading indicators (Fed statements, inflation data, employment reports)
• Stay flexible in your strategy and timing
• Focus on fundamentals (affordability, location, property quality) over rate timing

Practical Action Steps for 2025-2026

For Prospective Buyers

Immediate Actions:

1. Get Pre-Approved Now
   • Understand your borrowing capacity at current rates
   • Lock in pre-approval for 60-90 days
   • Know your absolute maximum payment comfort level
2. Evaluate Your “Why”
   • Is homeownership necessary now (growing family, job relocation)?
   • Can you afford current rates comfortably?
   • Is waiting worth potential price increases?
3. Consider Rate Buy-Downs
   • Ask sellers about contributing to buy down rates
   • Calculate break-even on paying points for lower rate
   • Explore 2-1 or 1-0 temporary buy-down options
4. Build Negotiation Strategy
   • Target properties sitting longer on market
   • Request closing cost assistance
   • Consider properties needing minor updates (less competition)
5. Prepare for Refinancing
   • Plan to refinance when rates drop 1.0% or more
   • Maintain good credit for future refinance qualification
   • Save closing costs in separate account

For Current Homeowners

Strategic Review:

1. Assess Your Situation
   • Current rate vs. market rates
   • Remaining loan term and balance
   • Plans to stay vs. move
   • Home equity position
2. If Considering Selling:
   • Calculate true cost of moving (new rate, transaction costs, moving expenses)
   • Evaluate portable mortgage options if available
   • Consider whether move is necessary vs. desired
   • Price competitively if listing
3. If Considering Buying:
   • Timing the sale of current home
   • Bridge financing or contingent offers
   • Impact of higher payment on budget
   • Alternative strategies (keep as rental?)

For Investors

Due Diligence Framework:

1. Conservative Underwriting
   • Use current rates (6.5%) in pro forma analysis
   • Don’t assume refinancing to lower rates
   • Stress test with rates 1.0% higher
   • Require positive cash flow from day one
2. Creative Financing
   • Explore assumable mortgages (FHA, VA loans)
   • Negotiate seller financing with better terms
   • Consider partnerships to reduce leverage
   • Evaluate private lending options
3. Market Selection
   • Focus on areas with strong employment and population growth
   • Target markets less sensitive to rate changes
   • Evaluate properties with value-add potential
   • Consider secondary and tertiary markets with better yields

The Bottom Line: Realistic Expectations for 2025-2026

What We Know with Confidence

Certainties:

1. Rates won’t return to 3-4% range in the foreseeable future
2. The Federal Reserve remains focused on 2% inflation before aggressive easing
3. Housing supply constraints will persist through 2025-2026
4. Rate forecasts will continue evolving based on economic data

What Remains Uncertain

Key Variables:

1. Inflation trajectory and Fed’s response speed
2. Economic resilience vs. potential softening/recession
3. Geopolitical events affecting energy and supply chains
4. Housing market psychology and lock-in effect duration

The Most Important Question

Should you wait for lower rates or act now?

The Answer Depends On:

• Your personal financial situation and goals
• Whether you can comfortably afford current payments
• Your timeline and flexibility
• Market conditions in your specific location

General Guidance: If you need to buy (lifestyle, family, job reasons) and can comfortably afford the payment, waiting for perfect rate timing often costs more through price appreciation than the rate savings deliver. The best time to buy is when it makes sense for your situation, not when rates hit an arbitrary target.

For those who can wait and don’t need to move, patience may pay off if 2026 brings the 5.9-6.1% rates currently forecast. However, this assumes home prices don’t appreciate significantly, which may not hold true in supply-constrained markets.

Conclusion

The mortgage rate forecast landscape for 2025-2026 reflects a fundamental reset in expectations. After years of ultra-low rates, the market is adjusting to a new normal where 6-6.5% rates may represent the baseline for the near term rather than a temporary spike.

Fannie Mae’s latest projections calling for mortgage rates ending 2025 at 6.4% and gradually declining to 5.9% by end of 2026 represent the current consensus, modest improvement but no dramatic relief. This outlook could change based on inflation progress, economic developments, and Federal Reserve policy evolution.

For homebuyers, sellers, and investors, success in this environment requires:

• Realistic expectations based on current forecasts, not wishful thinking
• Financial flexibility to adapt as conditions evolve
• Focus on fundamentals rather than timing the rate market perfectly
• Preparedness to act when opportunities align with personal circumstances

The “higher for longer” reality doesn’t mean opportunity disappears; it means strategy must adapt. Those who adjust their approach to current market realities while staying informed about evolving conditions will find success regardless of whether rates trend toward 6.0% or remain elevated near 6.5% through the next 12-18 months.

Stay Informed: Monitor Fannie Mae’s monthly Economic and Housing Outlook for the latest forecast updates and economic analysis driving mortgage rate expectations.

Related Articles:

• How Inflation Impacts Real Estate Values
• Time Series Forecasting: Why Forecast?

Franklin Carroll

Franklin Carroll is Kukun's VP of Modelling and Analytics; After finishing his studies at the University of Chicago, he worked at Fannie Mae where he helped build Collateral Underwriter, roll out the Value Verify initiative, and specialized in collateral related and credit related policy.

Published February 20, 2024