Mortgage Rates May Finally Fall—But a Housing Revival Depends on More Than Just Numbers
When mortgage rates spiked in 2022, jumping from around 3.5% to nearly 7%, it brought the COVID-era housing frenzy to a grinding halt. That sharp rise in borrowing costs priced many buyers out of the market and discouraged existing homeowners—many locked into historically low rates—from listing their homes. The result: a frozen housing market with limited inventory, stagnating sales, and strained affordability.
Economists had originally forecast a drop in mortgage rates by early 2025, but those hopes were tempered by persistent inflation and economic volatility. Despite three interest rate cuts from the Federal Reserve in late 2024, average mortgage rates have stayed above 6.5%. Still, analysts are cautiously optimistic that a turning point is coming. Morgan Stanley projects a gradual but steady decline in mortgage rates through 2026, driven primarily by falling treasury yields.
Mortgage rates are closely tied not just to the federal funds rate but to the 10-year treasury yield, which acts as a benchmark for lenders when pricing mortgage-backed securities. Lower yields often signal investor concern about economic conditions—when the economy weakens or uncertainty rises, demand for safer investments like government bonds pushes yields down. In turn, this drop can translate into lower mortgage rates.
Secretary of the Treasury Scott Bessent has announced the Trump Administration’s intention to bring down treasury yields as part of a broader strategy to provide relief for homebuyers. If successful, and if treasury yields fall as Morgan Stanley expects, mortgage rates could follow suit—potentially reviving a sluggish housing market.
However, there’s a catch. Lower mortgage rates that result from economic downturns don’t always lead to a housing boom. In fact, when consumer confidence is low and job security is shaky, people may be less likely to make major financial commitments, like purchasing a home. So while falling rates may open the door for some, broader economic stability will still be key to fueling meaningful housing activity.
That said, if mortgage rates can decline without the U.S. sliding into a deep recession, the impact on the economy could be significant. The National Association of Home Builders reported a boost in buyer confidence and increased housing activity following rate drops earlier in 2025. Morgan Stanley’s economists agree, pointing out that housing doesn’t just feed into GDP through construction—it also stimulates consumer spending. Homebuyers often spend more on furniture, appliances, and renovations after a purchase, creating a ripple effect throughout the economy.
Heather Berger, an economist at Morgan Stanley, emphasized this point: “Housing flows into gross domestic product (GDP) not only through residential investment, but also through the impacts on consumption. Households spend more on durable goods following home purchases.” That kind of economic multiplier effect could be especially important now, as the U.S. confronts the fallout from new reciprocal tariffs and slowing global trade.
In Q1 of 2025, U.S. real GDP slipped by 0.3%, largely due to reduced imports following trade actions from the Trump Administration. With global markets uncertain and trade tensions rising, domestic growth may increasingly depend on strong consumer sectors—like housing. If mortgage rates decline and home sales rebound, the housing market could play a crucial role in stabilizing and even jump-starting the broader economy.
While it remains to be seen whether rates will fall far or fast enough to spark a full-blown housing revival, the outlook for buyers may be brightening. For now, patience—and preparation—could be key for those waiting on the sidelines.