When inflation began to surge in 2022, The Federal Reserve began raising the federal funds rate to increase the cost of borrowing and deter consumer spending. The goal of suppressing inflation from over 9% to 2% was nearly achieved in late 2024, prompting the Fed to finally cut interest rates again.
Though mortgage rates were expected to drop below 6% following several rounds of interest rate cuts, mortgage rates began climbing back toward 7%, to the surprise of economists and homebuyers.
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Ongoing economic uncertainty, volatile financial markets, and stubborn inflation have kept mortgage rates elevated, stagnating housing activity among buyers and sellers.
In recent months, Fannie Mae has revised its mortgage rate forecast for 2025 and 2026 as inflation expectations, GDP growth, Fed policy updates, and housing market sentiment fluctuate.
The latest update offers a more optimistic view of the housing market for the next two years, and may be enough to restore homebuyer confidence and revive sluggish housing sales.
Fannie Mae forecasts a drop in mortgage rates and increased home sales through 2026
The July Federal Reserve Board of Governors meeting began July 29, and CME FedWatch predicts a 98% chance that the Fed holds interest rates at their current level. However, the probability of a rate cut at the September board meeting jumps to 65%, which could improve investor sentiment and homebuyer confidence.
The combination of a potential interest rate cut, the boost to financial markets, and rising housing inventory may push mortgage rates back to more palatable levels.
Fannie Mae recently revised its mortgage rate forecast, predicting rates will reach 6.4% by the end of 2025 and 6.0% by the end of 2026. This is a modest but welcomed update from the original projection of 6.5% and 6.1%, respectively.
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In addition to lower mortgage rates, housing market activity is expected to pick up, perhaps as a result of declining mortgage rates.
In its July 2025 Economic Developments release, Fannie Mae notes that “Our total home sales outlook for 2025 was revised to 4.85 million, up from 4.82 million previously. Our 2026 home sales projection is 5.35 million, up from 5.25 million.”
Declining mortgage rates are the most direct way to breathe new life into a faltering housing market, especially since the June 2025 Home Purchase Sentiment Index found that consumer sentiment toward housing is down month-over-month and year-over-year.
Fannie Mae expects home price growth to slow significantly in 2025 and 2026
Housing affordability is noted as the top roadblock preventing first-time homebuyers from purchasing a home, and that includes stubborn mortgage rates and surging home prices.
Average and median house sales prices have doubled since 2010, and down payment amounts have risen with them.
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First-time homebuyers may see housing market conditions improve further, as Fannie Mae projects that home sales growth will significantly decelerate over the two years.
“In our quarterly update to our house price forecast, we now expect home price growth to be 2.8 percent and 1.1 percent in 2025 and 2026 on a Q4/Q4 basis, respectively, compared to 4.1 percent and 2.0 percent in our prior forecast, as measured by the Fannie Mae Home Price Index (FNM-HPI).”
Years of muted homebuyer demand and months of rising inventory will likely stifle housing prices through 2026. This may not be favorable for sellers, but stable home prices could draw homebuyers back to the market, especially if paired with lower mortgage rates.
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