About a year ago, I predicted that the 30-year fixed would fall to 5.875% by the fourth quarter of 2025.
It didn’t quite get there, at least when speaking of national averages, but it got pretty close.
Depending on the gauge you use, the 30-year fixed is averaging roughly ~6.20% nationally.
That’s pretty darn close, and in practice, means many of today’s mortgage applicants are actually receiving quotes and real rates under 6% thanks to lower-priced lenders or discount points paid.
But how could we actually see sub-6% mortgage rates in the national averages in 2025?
1. Tighter Spreads
One area where there is perhaps some room for mortgage rates to ease is in the spreads.
The spread refers to the difference between the 30-year fixed and the 10-year Treasury yield, which acts as a bellwether for mortgage rates.
Historically, it has been around 170 basis points (bps), but it’s currently a bit bloated at about 210 bps.
That means there’s roughly 40 bps of room for this gap to close. However, you need a healthy appetite for mortgage-backed securities (MBS) for this to improve.
If we look at just the 21st century, we had several years in the early 2000s where there was an unhealthy appetite for MBS from Wall Street (think all those toxic mortgages that led to the GFC).
And another decade of Quantitative Easing, where the Federal Reserve actively purchased MBS by the trillions.
When you see demand for MBS exceed supply, the price goes up and associated interest rates fall.
So if that happens again, perhaps because ~6% rates look attractive to investors, you can get tighter spreads.
There’s also been more MBS buying by Fannie Mae and Freddie Mac lately, which has perhaps brought in the spread.
However, spreads already came down from a high of around 325 bps in 2023 when mortgage rates peaked around 8%, meaning much of this move has already corrected.
2. Lower Bond Yields
The other path to 5% mortgage rates in 2026 is through lower bond yields. While there are economists claiming bond yields have risen since the Fed cut rates, that’s untrue.
Sure, the relationship between Fed cuts and mortgage rates is complicated, especially lately, but they do tend to move in the same general direction over time.
And if we zoom out, despite mortgage rates rising once the Fed began to actually cut in September 2024, bond yields plummeted in early 2024 leading up to the actual cut.
The 10-year yield was around 5% in late 2023, then fell as far as 3.64% in September 2024 once that cut finally came.
It then bounced higher on a rogue hot jobs report and an election victory by Donald Trump, rising to around 4.75%.
Today, the 10-year is around 4.13%, so it’s still markedly lower than that 5% we saw in 2023, though elevated from last year.
But there’s a reasonable expectation it can fall back to the levels seen a year ago, around 3.75% or lower.
However, we might need ugly economic data to get there, which is kind of the catch-22 here.
That means more weak labor data and cool inflation, ideally more of the latter if we want the economy to hold up and avoid a recession.
3. Another Round of QE
One final way to get lower mortgage rates is via another round of QE, where the Fed specifically buys MBS.
It’s pretty unlikely, despite the Fed expected to become a lot more dovish once Powell’s term as Fed chair ends.
And as more Trump appointees enter the fray. But that might just amount to more rate cuts, which apply to short-term lending rates.
That would benefit HELOC holders, whose rates are tied to the prime rate, along with adjustable-rate mortgages.
In order to get long-term fixed-rate mortgages lower, they’d need to actually ramp up purchases of MBS again.
This is what got us in this mess to begin with, so reintroducing it seems like a bad idea and a stretch.
But we’ve already seen the Fed roll out reserve management purchases (RMPs) of short-term Treasury bills.
Some are calling this QE all over again, though it’s quite a bit different and certainly doesn’t involve mortgages or even long-dated Treasuries.
If and when that changes, you’d easily get a sub-6% mortgage rate given we are already super close to that level already.
At last glance, Freddie Mac has the 30-year fixed at 6.18% so it wouldn’t take much to get into the 5s. This also kind of tells you such a program wouldn’t be necessary if we’re pretty much there anyway.
Read on: 2026 Mortgage Rate Predictions
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