Major mortgage rate changes are coming, says Fannie Mae

The disinflationary arc that began in mid-2023 appeared to be on track for a textbook soft landing. Core PCE inflation slowed below 3%, employment remained resilient, and forward guidance from the Federal Reserve suggested a measured pivot away from the tightening cycle that had defined the previous two years. By late 2024, the Fed began gradually reducing the federal funds rate, and markets expected mortgage rates to follow suit, dropping below the 6% threshold in line with easing monetary conditions.

That didn’t happen.

Instead, 30-year fixed mortgage rates hovered near 7%, confounding policy projections and stalling a housing market recovery. Despite three successive rate cuts from the Fed, long-duration yields held firm. Fannie Mae’s revised forecast now reflects this new reality—one where falling inflation alone is not enough to unwind the structural repricing that has occurred in debt markets.

This isn’t merely a misalignment between the Fed and mortgage lenders. It signals deeper caution among capital allocators and a recalibration of duration risk in an environment where inflation uncertainty, geopolitical stress, and fiscal sustainability concerns continue to cloud forward-looking rate expectations.

The Federal Reserve Board of Governors began its July 2025 meeting with markets pricing in near-certainty that policy rates would remain unchanged. And they did. Yet the more important signal was embedded in the CME FedWatch Tool’s 65% probability of a rate cut in September—an expectation driven more by wishful forecasting than by anchored inflation behavior.

This divergence—between forward expectations and near-term caution—highlights a broader point: The Fed’s credibility no longer rests solely on its stated posture. Markets are watching not just the federal funds rate, but the consistency of messaging, the fiscal backdrop, and the tolerance for secondary inflation persistence.

Mortgage markets, in particular, have grown skeptical. The upward drift in mortgage rates since early 2025—despite easing by the Fed—suggests that investors are demanding a risk premium for duration exposure. That premium is not easily unwound by policy signaling alone. It reflects structural concerns: Will the Fed hold the line if inflation stalls at 3%? Will the U.S. Treasury continue expanding issuance to fund persistent deficits? Can soft-landing optimism survive a geopolitical or commodity shock?

These questions matter to buyers of mortgage-backed securities and institutional allocators managing interest rate exposure. And they are beginning to shape mortgage pricing more than the Fed’s near-term moves.

Fannie Mae’s July 2025 update lowers its year-end mortgage rate projection from 6.5% to 6.4%. For 2026, the estimate drops from 6.1% to 6.0%. These are marginal adjustments, but they mark a notable shift in tone—away from the assumption of a rapid reversion to sub-5% rates and toward a baseline of structurally higher borrowing costs.

In parallel, Fannie Mae anticipates a gradual increase in home sales volume, anchored in improved affordability and rising inventory. But this rebound is modest by design. There is no expectation of a liquidity-fueled boom. Instead, the outlook assumes housing market normalization will track alongside a broader macro environment where rates remain elevated relative to pre-2020 levels.

This is a departure from the post-GFC playbook. In that cycle, falling rates drove a decade-long housing recovery fueled by cheap debt and rising asset prices. Today’s policy environment is more constrained. Balance sheet normalization, fiscal drag, and monetary recalibration create headwinds that no single rate cut can overcome.

The implication is clear: Housing is no longer the transmission mechanism for monetary stimulus—it is a lagging, rate-sensitive sector that requires credible disinflation, regulatory stability, and durable wage growth to recover meaningfully.

The last time the Fed embarked on a dovish pivot after a rate-tightening cycle, mortgage rates fell quickly. In 2019, for example, 30-year mortgage rates dropped from 4.9% to 3.7% within six months of the Fed’s shift. That move reignited housing activity and helped prolong the late-cycle expansion.

But 2025 is structurally different. For one, the Federal Reserve is no longer the dominant buyer of mortgage-backed securities. Balance sheet reduction has tapered reinvestment activity, reducing price support for agency debt. Meanwhile, private investors are demanding higher spreads due to uncertainty about long-term inflation trends and Treasury issuance pressures.

Additionally, today’s fiscal environment introduces complications. The US fiscal deficit has widened even as unemployment remains low. This erodes confidence in the government’s ability to maintain macro discipline, prompting global investors to require a higher term premium on long-duration assets—including mortgage debt.

Unlike in the 2010s, when global disinflation and QE policies suppressed yields across developed markets, today’s environment is marked by volatility in commodity prices, fragile geopolitics, and a growing divergence in central bank behavior across regions. European policymakers remain on a more dovish path, while emerging market central banks are raising rates preemptively to defend currency stability. This divergence increases uncertainty and narrows the margin for error in Fed signaling.

The mortgage rate drift is not a policy failure—it’s a reflection of market autonomy. Investors have repriced the risk embedded in long-duration debt and are no longer following the Fed’s lead uncritically. In effect, the bond market is imposing its own policy overlay, one that penalizes complacency and rewards caution.

For institutional allocators, the message is sobering. In previous cycles, falling policy rates translated into lower borrowing costs, easing the capital structure for housing-related plays. Today, mortgage REITs, homebuilders, and agency MBS desks face a landscape where cost of capital remains sticky, and refinancing activity remains tepid.

Sovereign wealth funds with exposure to US real estate debt instruments must now navigate an environment where upside is capped, and downside risk is tied to long-duration volatility. Those looking for carry must weigh yield against liquidity constraints, while those seeking safety may shift capital to short-duration government debt or alternative asset classes entirely.

The capital flight risk is not dramatic—but it is directional. And that direction points to greater caution, not greater risk appetite.

Beneath the surface of Fannie Mae’s modest forecast update lies a more fundamental shift in institutional posture. The agency’s projection is not merely technical—it is strategic. It reflects internal modeling that assumes the Fed’s inflation battle is closer to the midpoint than the endpoint, and that housing will recover only if investor sentiment aligns with long-term rate stability.

This is not a forecast built on stimulus hopes or price reflation. It is a forecast rooted in policy realism. A 6.0% mortgage rate in 2026 would still be historically elevated, especially when compared to the ultra-low era of 2012–2021. But it is also survivable. It suggests a market that is regaining equilibrium—not through exuberance, but through adaptation.

Institutional players will interpret this as a green light for cautious reentry. Not because the housing market is cheap, but because it is now priced with greater honesty. That shift—from artificial affordability to transparent cost of capital—may be painful in the short term, but it is necessary for long-term capital discipline.

Fannie Mae’s revised mortgage forecast may look like an incremental update. But the macro signal is clear: Capital markets are no longer responsive to short-term policy cues alone. They are repricing risk with an eye toward fiscal discipline, global volatility, and institutional credibility.

The path to 6% mortgage rates is not a stimulus play—it’s a slow unwinding of distorted expectations. This policy posture may appear accommodative—but the signaling is unmistakably cautious.