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The recent pullback in mortgage rates should provide a “small boost” to home sales this year, and there’s room for mortgage rates to keep coming down into the low sixes this year, Fannie Mae economists said Friday.
But that’s in part because Fannie Mae forecasters now expect that tariffs implemented by the Trump administration will inflate prices and slow economic growth.
Mark Palim
“While our latest forecast calls for a period of modestly slower economic growth, historically, interest rates have been the most important driver of home sales,” Fannie Mae Chief Economist Mark Palim said, in a statement. “We think mortgage rates will move even lower within the next quarter and ultimately close the year at approximately 6.3 percent, which could be low enough to generate some extra sales from any would-be buyers still waiting on the sidelines.”
In their March forecast, Fannie Mae economists said they now expect the U.S. economy will grow by 1.7 percent this year, down from February’s forecast of 2.2 percent growth in 2025.
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Forecasters with Fannie Mae’s Economic and Strategic Research (ESR) Group now expect inflation (as measured by the Consumer Price Index) to rise to 3.2 percent by the end of the year, compared to February’s forecast of 2.8 percent.
“While the growth outlook has softened, we expect the upward pressure on price measures from tariff dynamics may lead to the Federal Reserve taking a wait-and-see approach as it seeks to balance its dual mandate for full employment and price stability,” Fannie Mae economists said in commentary accompanying their forecast.
Fannie Mae’s latest forecast takes into account a 20 percent increase in tariffs on goods from China, and half of the 25 percent tariff on goods from Canada and Mexico, since about half of those goods are exempt under the United States-Mexico-Canada Agreement (USMCA).
The forecast does not take into account plans to impose a 25 percent tariff on imported cars and car parts announced by the Trump administration on March 26 and set to take effect April 3.
Major stock market indices tumbled and bond yields fell on Friday over renewed fears that tariffs will spark a trade war and economic slowdown. Canada, Mexico, Japan, South Korea and Germany are mulling retaliatory measures if negotiations fail and the tariffs are implemented.
Rates on 10-year Treasury notes, a barometer for mortgage rates, fell 11 basis points Friday to 4.26 percent and are now down more than half a percentage point from a 2025 high of 4.81 percent registered on Jan. 14.
Since hitting a 2025 peak of 7.05 percent on Jan. 15, rates on 30-year fixed-rate conforming mortgages have come down 40 basis points, averaging 6.65 percent as of Thursday, according to rate lock data tracked by Optimal Blue.
Mortgage rates expected to ease
Source: Fannie Mae and Mortgage Bankers Association forecasts, March 2025.
The recent pullback in mortgage rates, coupled with the slower outlook for growth, means Fannie Mae forecasters now think mortgage rates will drop below 6.5 percent in the second half of this year, and average around 6.2 percent most of next year.
That’s a notably more optimistic outlook than February, when forecasters at Fannie Mae’s ESR Group said they expected rates for 30-year fixed-rate loans would still be averaging 6.8 at the end of this year and 6.5 percent at the end of 2026.
In a March 20 forecast, economists at the Mortgage Bankers Association said they don’t expect rates to come down quite as quickly, and predicted rates will stay in the mid-sixes all of next year.
Fannie Mae forecasters said they revised their mortgage rate forecast downward due to the recent drop in rates.
“However, there is an unusually high degree of uncertainty regarding the path for growth and inflation during the rest of 2025, which adds risk to our interest rate forecasts,” Fannie Mae economists said.
Uncertainty includes “the likely path of fiscal, monetary and other policy developments, but also how firms and consumers respond to them and other financial market developments. There are plausible upside and downside risks to both growth and inflation measures over our forecast horizon, as well as to interest rates.”
Home sales expected to approach 5M this year
Source: Fannie Mae forecast, March 2025.
While Fannie Mae economists now expect the economy to grow more slowly than they did a month ago, the prospect of lower mortgage rates prompted them to raise their outlook for 2025 home sales to 4.95 million in 2025, up slightly from 4.90 million in February.
But recent declines in purchase applications and pending home sales highlight “the challenges that the housing market continues to face as affordability challenges and the lock-in effect remain persistent headwinds, even with some improvement in mortgage rates.”
New single-family home sales fell by 10.5 percent in January, to a seasonally adjusted annual rate of 657,000. For new home sales, there’s an added risk that tariffs on lumber and other building materials could push up prices and slow the pace of new home construction.
Robert Dietz
Builders surveyed in March estimated that tariffs will add $9,200 in additional costs per home, on average, and that policy uncertainty “is also having a negative impact on home buyers and development decisions,” National Association of Home Builders Chief Economist Robert Dietz said in commentary published March 21.
Source: Fannie Mae forecast, March 2025.
But lower mortgage rates “would also give homebuilders some additional support by not having to offer as steep concessions and rate incentives to drive sales,” Fannie Mae economists said. “As such, we have only made minor revisions to our new home sales and starts outlooks, largely reflecting incoming recent data.”
Although single-family housing starts declined in January, Fannie Mae economists said data on single-family permits is typically a better indicator of the underlying trend, and those numbers are in line with their Q1 forecast.
Purchase mortgages projected to grow by 10% this year and next
Source: Fannie Mae forecast, March 2025.
If mortgage rates come down and home prices hold firm, Fannie Mae economists expect purchase mortgage origination volumes will grow by 10 percent this year, to $1.43 trillion, an upgrade of $12 billion from February’s forecast. Purchase mortgage originations are projected to grow another 10 percent in 2026, to $1.58 trillion, a $16 billion upgrade from last month’s forecast.
Fannie Mae economists now expect lenders will refinance $502 billion in mortgages this year and $699 billion in 2026.
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