When the Fed began cutting interest rates in September, many economists and housing experts expected mortgage rates to drop in tandem. However, months of political and economic uncertainty and volatile financial markets have put upward pressure on mortgage rates.
Initial projections anticipated mortgage rates would fall below 6% by the end of 2025. However, Fannie Mae revised its forecast several times to factor in Fed interest rate adjustments, inflation, housing sentiment, and general market uncertainty.
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In a surprising development, the housing organization has recently adjusted its mortgage rate prediction again for 2025 and 2026.
The new forecast paints a much brighter picture of the housing market in the year ahead, potentially reigniting homebuyer confidence and boosting spring housing sales.
Though mortgage rate projections are subject to change, a mortgage rate relief could be the catalyst needed to rekindle housing market activity.
A young family in their new home. Years of persistent mortgage rates and rising home prices have locked many would-be homeowners out of the housing market. However, buyers may be getting an encouraging mortgage rate update soon.
Image source: Shutterstock
Mortgage rates may be lower than expected in 2025
In February, Fannie Mae shockingly revised its mortgage rate forecast, estimating that rates would average nearly 7% by the end of this year and 6.5% by year-end 2026. Inflation expectations, economic uncertainty, and financial volatility caused grim expectations for the housing market.
However, mortgage rates have been dropping modestly over the past few months and reached 6.62% this week, the lowest level since October.
Fannie Mae now expects mortgage rates to taper down to 6.3% this year and 6.2% in 2026. Mark Palim, Chief Economist at Fannie Mae, explains the underlying economic factors that shifted mortgage rate projections.
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“We expect the recent pullback in mortgage rates will provide a small boost to home sales this year,” Palim said. “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.”
Many homebuyers have been waiting for housing inventory to rise and mortgage rates to fall before making the commitment to buy a home. This positive update could bring much-needed optimism and confidence to the housing market.
Lower rates may bring a booming spring housing market
In light of lower mortgage rate expectations, Fannie Mae predicts housing sales will improve over the next two years. Total home sales are now projected to reach 4.95 million this year, up from 4.90 million, generating a total of $1.94 trillion.
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Spring typically creates the hottest housing markets of the year, as the warm weather incentivizes buyers and sellers, and families tend to time moves with the academic school year.
“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,” Palim continued.
Housing activity was expected to be weaker this spring than in previous years, but favorable mortgage rates could persuade otherwise cautious buyers.
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