When inflation surged in 2022, the Federal Reserve raised interest rates to increase the cost of borrowing and deter spending. The federal funds rate and mortgage rates remained elevated for years while the Fed worked to suppress inflation, until Fed chair Jerome Powell unveiled plans for consistent rate cuts last September.
Economists and housing experts expected mortgage rates to follow suit and drop as interest rates decreased, but economic uncertainty, volatile financial markets, and a precarious political climate have kept rates high.
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Initial projections suggested mortgage rates could dip below 6% by the end of 2025. However, housing market sentiment and mortgage rate expectations have fluctuated this year, prompting Fannie Mae to revise its projections several times.
Although mortgage rates were expected to steadily decline, shifting Fed policy, stubborn inflation, trade wars, wavering housing sentiment, and broader market unpredictability have put upward pressure on rates again.
Though 2025 and 2026 mortgage rate predictions remain fluid, even a modest drop in mortgage rates could be enough of a spark to reignite a tepid housing market.
2025 and 2026 mortgage rates will be higher than previously expected
Last month, Fannie Mae revised its mortgage rate forecast, anticipating rates reaching just over 6% by the end of 2025, and dipping to 5.8% by the end of 2026. The rise in housing inventory and improved economic growth influenced the optimistic housing market projections.
However, rising 10-year treasury yields, continued economic uncertainty, and mounting geopolitical tensions have kept mortgage rates elevated, preventing any progress toward the projected 6% rate.
Adjusting for these heightened conditions, Fannie Mae revised its mortgage rate forecast upward, predicting average rates of 6.5% by the end of 2025, and 6.1% by the end of 2026. This marks a significant jump from last month’s projections that rates would fall to 6.1% and 5.8% over the next two years.
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While this may seem like a substantial shift, mortgage rate predictions largely mimic fluctuations in economic sentiment, meaning that mortgage rate expectations could still change as the year progresses.
When Fannie Mae revised its mortgage forecast in February to account for higher mortgage rate projections, Chief Economist Mark Palim noted that mortgage rates would continue to fluctuate this year as economic developments unfold.
“As such, we continue to expect mortgage rate volatility as markets react to tariff implementation, incoming economic data, and other fiscal policy changes,” he said in the February press release.
Despite uncertainty, housing market sentiment is up month-over-month and year-over-year
Although housing market confidence has been down since mortgage rates skyrocketed in 2022, conditions appear to be improving. For the first time since 2013, the housing market has 500,000 more sellers than buyers.
Although mortgage rates are taking longer than anticipated to fall, buyers are warming to the housing market.
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Fannie Mae’s May National Housing Survey found that housing sentiment is up 4.3 points from April and 4.1 points from May 2024 to May 2025.
Most prospective buyers have curbed expectations that mortgage rates will revert back to previous levels between 3% and 5%, and many have been encouraged by the shift in market favorability toward buyers.
As housing inventory increases from more sellers listing their homes and buyers regaining negotiating power, housing sentiment could rise in spite of stubborn mortgage rates.
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