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Fannie Mae expects mortgage rates to fall below 6% by the end of 2026.
In its March Housing Forecast, the government-sponsored enterprise updated its predictions for the housing market. The report suggests relief is coming for homebuyers who have been sidelined by high borrowing costs.
The forecast projects the average 30-year fixed mortgage rate will sit at 6% through the first quarter of the year. After that, rates are expected to steadily decline.
Fannie Mae predicts the rate will drop to 5.9% in the second quarter, 5.8% in the third, and 5.7% by the fourth quarter of 2026. The organization expects rates to hover between 5.6% and 5.7% throughout 2027.
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These numbers are an improvement from Fannie Mae’s February outlook. Last month, the agency projected rates would stay at 6.1% through the first half of 2026 and remain at 6% through 2027.
The downward revision is tied to broader economic expectations. Fannie Mae’s March Economic Forecast predicts slower gross domestic product growth than it did in February.
When GDP growth slows, it signals a cooling economy. Mortgage rates typically follow the economy’s trajectory, falling when growth slows down. The agency also lowered its forecast for the 10-year Treasury yield, which serves as the benchmark for 30-year fixed mortgage rates.
Lower rates would improve housing affordability. “Our estimates suggest this will be the first time we see monthly payments decline since 2020,” said Danielle Hale, chief economist at realtor.com.
Hale noted that lower mortgage rates will help offset the 2% home price growth expected in 2026. “On net, affordability is improving because those monthly payments are shrinking, and incomes are also expected to grow,” she said. “In real terms, home prices are actually going to decline, meaning they’ll be more affordable relative to other goods and services. That doesn’t mean we’ll see sticker prices fall, but it does mean affordability is improving.”
The National Association of Realtors is also optimistic about the impact of lower rates. Lawrence Yun, NAR’s chief economist, expects the combination of lower rates and more inventory to bring buyers back to the market.
“Next year should be better with lower mortgage rates, and that will qualify more buyers,” Yun said. He projects home sales will increase by about 14% nationwide in 2026.
Yun also pointed out that the “lock-in effect” is steadily disappearing. Homeowners who previously refused to sell because they didn’t want to give up low mortgage rates are increasingly listing their properties due to life-changing events.
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While falling rates are good news for buyers, there is a catch buried in the Fannie Mae data.
The agency’s March report downgraded its expectations for new home construction for most of 2026. Fannie Mae now predicts single-family housing starts will decrease by 6.2% year over year for the first three quarters.
This is a significant drop from the February forecast. Fewer housing starts mean less new inventory hitting the market.
The U.S. is already facing a severe housing shortage. Robert Dietz, chief economist at the National Association of Home Builders, said that the structural housing deficit remains a major constraint on affordability.
“The housing stock is not large enough given the size of the population,” Dietz said. “The only way to really solve the housing affordability challenge is to build our way out of it. We need more single-family homes, more multifamily homes and more homes for both sale and rent to meet the needs of a younger population.”
When demand from lower mortgage rates meets a restricted supply of homes, the result is usually higher prices. If builders are starting fewer homes, the existing inventory will face more competition.
This dynamic is already creating unusual market conditions. According to Dietz, the median resale home price is currently higher than the median price of a newly built home.
“That’s only happened two or three times over the last few decades,” Dietz noted. He attributed the flip to builder incentives, price cuts, and the geographic locations of new construction.
Fannie Mae does expect construction to rebound eventually. The agency predicts a 5.1% increase in single-family housing starts in 2027, up from the 2.4% increase it projected in February.
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Until that new inventory arrives, buyers will have to navigate a tight market. While inventory levels are about 20% higher than a year ago, they remain below pre-pandemic norms.
“We’re not back to pre-COVID inventory yet, which I would consider normal, so we’re still in a slight housing shortage condition,” Yun said. “But consumers do not have to rush decisions the way they did before—there are more choices out there and less prevalence of multiple offers.”
There is also a significant caveat to Fannie Mae’s rate forecast. The March predictions are based on interest rate data from Feb. 27.
That date was the day before the U.S. and Israel launched military strikes against Iran. Since the conflict began, mortgage rates have increased, according to Freddie Mac data.
Geopolitical instability often drives investors toward safe-haven assets like U.S. Treasuries, which can push yields and mortgage rates lower. Inflation concerns tied to oil supply disruptions can have the opposite effect.
If the conflict escalates and drives up energy prices, inflation could remain stubborn, forcing the Federal Reserve to keep interest rates higher for longer. This would directly impact mortgage rates. The Federal Reserve doesn’t directly control mortgage rates, but its decisions on the federal funds rate influence the overall cost of borrowing.
Because of this timeline, Fannie Mae’s April outlook could look very different. The March forecast provides a baseline for what the market expected before the Middle East conflict intensified.
For now, the expectation is that rates will trend downward, but buyers waiting for a 5.7% rate will also be waiting for a market with fewer new homes being built.
The combination of lower rates and restricted supply means that while monthly payments might shrink, the competition for available homes will likely remain fierce. Buyers may find that the homes they can finally afford are harder to find. The housing market is rebalancing, but the path to normal inventory levels will take time.
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This article Fannie Mae Says Mortgage Rates Will Drop To 5.7% By Year End — But Here’s The Catch Nobody Is Talking About originally appeared on Benzinga.com
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