Mortgage rates have been on a steady decline in recent weeks, fueled in part by weaker-than-expected job market data. According to Selma Hepp, chief economist at Cotality, the combination of economic headwinds, potential policy shifts, and affordability challenges could influence how rates move for the rest of 2025—and even into 2026.
Economic Signals Point to Continued Softening
The latest drop in mortgage rates followed a disappointing jobs report, which heightened speculation that the Federal Reserve may take a more dovish stance on interest rates. However, uncertainty remains high. The unexpected termination of Bureau of Labor Statistics chief Erika McEntarfer has economists questioning the reliability of upcoming economic data, which could complicate predictions.
Hepp notes that a slowing economy could keep mortgage rates trending lower, potentially igniting a burst of housing activity this fall. “We could see a slowing of mortgage rates because of a potentially slowing economy,” she said. Last September, a similar rate drop of nearly 100 basis points temporarily boosted housing demand.
Home Prices Flat, Affordability Still a Hurdle
While rates have eased, Hepp emphasizes that affordability remains the bigger challenge for homebuyers. Home prices have been relatively flat, with seasonal increases weaker than normal. Without significant changes in either prices or mortgage rates, she expects housing activity to remain stable until at least spring 2026.
“It’s really about affordability more than it is where the actual mortgage rates are,” Hepp explained, pointing out that rates are still nearly 400 basis points higher than their pandemic-era lows. Since those historically low levels are unlikely to return without a severe economic downturn, meaningful improvement in affordability will require either a drop in home prices, further declines in rates, or both.
Risks of a Price Correction
While lower home prices could improve affordability, Hepp warns that a steep correction could harm the market. Significant price drops risk pushing homeowners into negative equity, especially if the economy slips into recession. This could lead to higher mortgage delinquencies, creating a new set of financial challenges.
Fed Independence and Global Investment Concerns
Another factor that could shape mortgage rates is the perceived independence of the Federal Reserve. Political pressure on the Fed, or a shift in leadership, could undermine investor confidence. Foreign investors—historically major buyers of U.S. debt—might view a politicized Fed as a risk, demanding higher yields and pushing mortgage rates up.
“If investors think the U.S. is riskier, they will want to be compensated for that risk,” Hepp noted. Such a shift in sentiment could widen the spread between Treasury yields and mortgage rates, potentially reversing recent declines.
The Road Ahead: Gradual Easing, Not a Free Fall
Looking ahead, most economists expect only gradual declines in mortgage rates, not a return to the ultra-low levels seen during the pandemic. Any significant movement will depend on how economic conditions evolve, the Fed’s policy decisions, and the housing market’s ability to address affordability challenges.
For buyers, Hepp’s advice is clear: focus less on chasing the absolute lowest mortgage rates and more on how the payment fits into your budget and long-term wealth-building goals. The perfect timing to buy may be less about market predictions and more about personal financial readiness.
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