Mortgage Rate Outlook: Gradual Improvement Continues

As the 2026 forecasts roll out, one theme stands out: gradual but meaningful improvement. While headlines warn of everything from AI bubbles to economic shocks, the housing market looks comparatively steady—and increasingly predictable.

Housing: Affordability Slowly Returns

(Un-)Affordability has been the housing story of the last few years. Housing costs recently peaked at about 42% of median household income, far above the long-standing 30% rule of thumb. The good news is that pressure is easing. With home prices forecast to be roughly flat in 2026, affordability has room to recover. The price-to-income ratio peaked above 5.5x income in 2022, has fallen to about 5.3x, and is projected to dip below 5x next year. Truly balanced markets tend to sit closer to 4x income, so there’s still work to do—but the trend is in the right direction, especially if incomes continue to rise.

Activity: The Lock-In Effect Is Fading

Market activity should pick up in 2026 as the “lock-in” effect of 3% mortgages continues to fade. There are now more mortgages above 6% than at 3% or below, meaning more homeowners are willing to move. That points to more listings, better choices, and more balanced markets—all while homeowners still hold record levels of equity.

Rates: They’ve Been Sticky. What’s Next?

The Fed has cautiously trimmed short-term rates over the past 15 months, but mortgage rates haven’t followed as neatly. The most recent two Fed cuts (50 basis points) were followed by 10-year Treasury yields—closely tied to mortgage rates—actually rising by about 20 basis points. Why? The bond market is more concerned about inflation re-accelerating than the labor market weakening. With mixed data (and recent disruptions to jobs reporting), markets are firmly in waitand-see mode.

Looking ahead, mortgage rates are expected to drift slowly into the low-6% range, with occasional dips below 6% driven by headlines. The Fed is likely to remain cautious and data-driven.

Bottom Line

All signs point to a much healthier environment for buyers in 2026: improving affordability, better inventory, more balanced pricing, and gradually easing rates. Momentum matters—and the trend may finally be your friend. If you’re planning a move soon or laying longer-term plans, now is a smart time to talk strategy and get positioned.

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