The U.S. housing and mortgage landscape is showing increasing signs of strain amid economic headwinds, rising rates, and shifting policy. Both new and existing home sales underwhelmed in June, pushing inventory levels to multi-year highs. The median new home price declined nearly 3 percent year-over-year, though moderating shelter inflation still looms as a drag on consumer budgets. Housing, a cornerstone of U.S. economic health, now poses a potential downside risk to growth in the second half of 2025. HUD released a proposal to adjust Mortgage Insurance Premiums for FHA multifamily programs, a move aimed at addressing financing barriers and encouraging rental housing development.
At the macro level, yields remain range-bound, with the 10-year Treasury hovering near its 200-day moving average. The bond market appears to be digesting a mix of softening inflation, a less aggressive Fed, and manageable supply pressure. While expectations of a higher long-run neutral rate persist, especially with a potential shift in Fed leadership, the likelihood of a dramatic yield spike has diminished. Investors are increasingly pricing in a scenario of moderate rate cuts and subdued inflation without the extremes of either stagflation or a deep recession. Consequently, the 10-year yield is seen as likely to settle between 4.10 percent and 4.625 percent in the medium term, barring major surprises.
Fannie Mae ESR Group’s July outlook reflects this cautious sentiment, with lowered projections for mortgage rates and home price growth. Mortgage rates are now forecast to end 2025 and 2026 at 6.4 percent and 6.0 percent, respectively, while home price gains are expected to be modest. Despite a small drop in rates last week, affordability remains a significant barrier, with the median existing home price hitting a record $435,000. Inventory remains constrained in many markets, keeping prices elevated despite weak demand. Forecasts for total home sales remain muted, reinforcing the view that both buyers and sellers are sidelined by affordability and macro uncertainty.
Meanwhile, geopolitical trade developments (e.g., the new U.S.-Japan tariff deal and potential progress with the EU) have added complexity to the inflation and interest rate narrative. The latest agreement reduced Japanese tariffs and included promises of investment and market access, easing trade tensions and supporting a “risk-on” sentiment. However, recent data, including a 9.3 percent drop in durable goods orders and rising import prices (excluding fuel), suggests ongoing economic volatility. The tug-of-war between slowing global demand and sticky input costs continues to cloud the inflation outlook, challenging the Fed’s balancing act. The Fed is not expected to cut rates next week.
Looking ahead, mortgage demand remains tepid but does show signs of life, with applications rising slightly and refinancing activity holding steady. Yet uncertainty remains the prevailing theme across markets. Bond yields have effectively “round-tripped” their late June moves, while high-frequency data presents conflicting signals. We've seen port slowdowns, weak sales, and resilient jobless claims. Traders await upcoming business sentiment surveys and new inflation readings, but for now, the market’s tone reflects cautious optimism that economic rebalancing, via rate normalization, trade recalibration, and slower housing inflation, can proceed without sparking fresh instability.