I got to thinking that one way mortgage rates could come down is due to housing market weakness.
The thought is layered in all types of irony because the Fed arguably raised rates back in 2022 due mostly to an overheated housing market.
Back then, they knew the only way to push back demand was to end QE, raise their own fed funds rate, and hope mortgage rates followed.
Mortgage rates did indeed follow, rising from around 3% to over 7% in less than a year.
And now the longer-term result of that rate hiking campaign could finally lead to more easing.
The Housing Market Is Teetering, Finally
It took a lot longer than anticipated, but the housing market is finally showing real signs of stress.
Affordability has been a problem for a couple years now, due largely (again) to mortgage rates.
But now we’re finally seeing for-sale inventory grow and home prices begin to fall or move sideways in many markets.
The latest weak data was housing starts, which came in below expectations.
Housing starts, which represent the breaking ground of new builds, fell almost 10% in May and were off nearly 5% from a year ago.
Meanwhile, building permits, the step proceeding starts, slid to a seasonally adjusted annual rate of 1.393 million in May, per the Census Bureau, the lowest level in almost five years.
Then there was home builder sentiment, which dropped to its third lowest point since 2012, which was around the time the housing market bottomed from the prior cycle.
Lately, builders have been under immense pressure to unload homes, throwing the kitchen sink at prospective home buyers to get deals done.
But more have finally begun to see the writing on the wall and are actually lowering prices instead of simply offering upgrades and mortgage rate buydowns.
Despite all that, home prices are still expected to eke out small gains over the next few years.
A panel of more than 100 housing experts expect home price growth to average just 2.9% in 2025 and 2.8% in 2026, per the latest Fannie Mae Home Price Expectations Survey (HPES).
That’s down from 3.4% in 2025 and 3.3% in 2026 in the prior forecast, and well below the 5.3% in national home price growth for 2024.
To sum things up, the housing market is finally cracking under the pressure of high mortgage rates and the poor affordability that goes with them.
Lower Mortgage Rates Could Arguably Right the Ship Here
Ever since mortgage rates surged higher in 2022, folks worried that any quick reversal would simply lead to the same problems that required the higher rates to begin with.
It was a catch-22. Too much home buyer demand and not enough housing supply, thereby fanning the flames and causing home price appreciation to continue running too hot.
But two things are different today. One is time. It’s been several years now since the 30-year fixed climbed above 6% and stayed there.
That has allowed for-sale inventory to finally play catch up and begin to outpace demand in many (not all) markets nationwide.
The other thing is that there’s a new perception of mortgage rates today in that we’ve gotten used to higher-for-longer.
That is to say that if mortgage rates come down from current levels, but stay well above those record low levels, they won’t necessarily cause a frenzy.
After seeing 8% mortgage rates in late 2023, and 7% for much of the past year and change, we could normalize with something closer to 6% or perhaps the high 5s.
In other words, a sweet spot of sorts where rates aren’t so low that they cause overspeculation, but not too high where they continue to crush the housing market.
When it boils down to it, the builders are struggling mainly due to high mortgage rates.
It’s causing them to create workarounds, namely massive mortgage rate buydowns, to get deals to the finish line.
If rates were that little bit lower, they wouldn’t need to do that nearly as much, nor would it cost them as much money.
But Housing Market Pain Might Be the Only Way to Lower Mortgage Rates
The situation is tricky though. You kind of need some level of housing market pain for the Fed to act, and for bond yields to come down.
And you need this to be convincing enough to offset any fears related to tariffs reigniting inflation, or the government spending bill creating a Treasury bond glut.
So the housing market might need to deliver some bad data for consecutive months to get the Fed’s attention (and that of bond traders).
Only then will yields be able to come down, and mortgage rates with them. And only lower mortgage rates will provide true relief to the housing market.
Remember, a 1% decline in mortgage rate is akin to an 11% price drop.
Chances of home prices dropping by double-digits isn’t the likeliest outcome, even with inventory rising and home buyer demand weak.
Lower mortgage rates are the path of least resistance, and cuts might finally be acceptable with the housing market and wider economy no longer showing a lot of strength.
Read on: 2025 mortgage rate predictions (how do they look at mid-year?)
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on X for hot takes.