As the inflation rate grew in 2022, the Federal Reserve responded by hiking the federal funds rate to make borrowing more expensive and to slow down consumer demand.
This aggressive interest rate strategy aimed to bring inflation down from a peak above 9% to a target of 2%, a milestone that was nearly reached by the end of 2024. This progress led the Fed to begin lowering interest rates once again.
Despite expectations that mortgage rates would fall below 6% after multiple rate cuts, they unexpectedly rose again toward 7%, catching both economists and prospective homebuyers off guard.
Persistent economic instability, unpredictable market conditions, and lingering inflationary pressures have kept mortgage rates high, dampening activity in the housing market and discouraging both buyers and sellers.
The Federal Reserve most recently cut interest rates on Sept. 17, lowering the federal funds rate by 0.25 percentage points, from a range of 4.25%–4.5% to 4.0%–4.25%.
This was the first rate cut since a previous cut in December 2024. The move came amid concerns about a weakening labor market and persistent inflation, with Fed officials signaling that additional cuts could follow later in the year.
“Mortgage rates are forecast to end 2025 and 2026 at 6.4 percent and 5.9 percent, respectively,” according to the September 2025 Economic and Housing Outlook from the Fannie Mae Economic and Strategic Research (ESR) Group. “The ESR Group projects new and existing home sales to total 4.72 million in 2025 and 5.16 million in 2026.”
Fannie Mae predicts mortgage rates below 6% in 2026
Fannie Mae revised its mortgage rate forecast and other predictions about the U.S. economy in the September report. Among its projections are:
- Mortgage rates are expected to end 2025 and 2026 at 6.4 percent and 5.9 percent, respectively, compared to 6.5 and 6.1 percent in Fannie Mae’s prior forecast.
- The government-sponsored enterprise’s total home sales outlook for 2025 was revised to 4.72 million, compared to 4.74 million previously. Its 2026 home sales projection is 5.16 million, compared to 5.23 million previously.
- Fannie Mae projects its single-family mortgage originations to rise to $1.85 trillion and $2.32 trillion, respectively, for 2025 and 2026, compared to the previous forecast of $1.85 trillion and $2.26 trillion, respectively.
- It revised its real gross domestic product (GDP) growth outlook for 2025 and 2026 to 1.5 percent and 2.1 percent on a Q4/Q4 basis, compared to 1.1 percent and 2.2 percent in its previous forecast, respectively.
- Regarding inflation, Fannie Mae expects the Consumer Price Index (CPI) to rise to 3.1 percent Q4/Q4 in 2025, compared to its August forecast of 3.3 percent. The CPI outlook for 2026 is 2.6 percent, a prediction that is unchanged.
Image source: Acker/Bloomberg via Getty Images
Affordability blocks potential homebuyers from purchasing houses
The biggest barrier facing first-time homebuyers is the lack of affordable housing, driven largely by persistently high mortgage rates and rapidly rising property values.
Since 2010, both average and median home sale prices have increased by about twofold, and the required down payments have climbed in tandem, making homeownership challenging.
More on homebuying:
- Housing expert reveals surprising ways to reduce your mortgage rate
- Dave Ramsey predicts major mortgage rate changes are coming soon
- Housing expert reveals mortgage rate prediction amid Fed rate cut
A prolonged slowdown in buyer interest combined with a steady increase in available homes is expected to keep housing prices subdued through 2026.
While this trend may pose challenges for sellers, consistent pricing — especially alongside declining mortgage rates — could help reignite buyer activity and bring more people back into the housing market.
The Fed is widely expected to cut interest rates further in 2025
Policymakers anticipate a gradual reduction in the federal funds rate through the remainder of the year, according to the Federal Reserve’s September 2025 Summary of Economic Projections.
The median projection places the rate at 3.6% by year-end, down from earlier levels above 4%.
Related: Dave Ramsey shares key insight on mortgage rates
The Fed’s approach remains data-dependent, aiming to balance price stability with maximum employment. While further rate cuts are possible, officials stress caution amid lingering inflation risks and global economic uncertainty.
Federal Reserve Chairman Jerome Powell explained that the Fed will respond to economic developments and will consider future action meeting by meeting.
“Labor demand has softened, and the recent pace of job creation appears to be running below the break-even rate needed to hold the unemployment rate constant,” Powell said.
Related: Fed policy shakeup could have major mortgage rate, housing market impact
#Fannie #Mae #predicts #major #mortgage #rate #change #coming