In this episode of The REconomy Podcast™, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi dig into the question on every potential home buyer’s mind, “where are mortgage rates headed through the end of the year?” Their conversation highlights why rates are not the only driver of market activity and explain the “dual lock-in effect” keeping a lid on housing market activity. However, there’s reason for optimism, as a new real estate cycle may be emerging.

Don’t miss a single REconomy episode, subscribe today.

Listen to the REconomy Podcast™ Episode 123:

“We often forget that affordability is about more than just mortgage rates. It’s also about incomes and house prices. Nationally, price appreciation has slowed to the low single digits. In some Southern and Western markets, prices have even declined compared to a year ago. So, we’re seeing a gradual—and in some places, more than gradual—shift toward a more buyer-friendly market.” — Odeta Kushi, Deputy Chief Economist

Transcript:

Odeta Kushi - Hello and welcome to episode 123 of The REconomy Podcast, where we discuss economic issues that impact real estate, housing, and affordability. I'm Odeta Kushi, deputy chief economist, and here with me is Mark Fleming, chief economist. Hey Mark, I’m sure you’ve heard the outdated real estate adage—marry the house, date the rate.

Mark Fleming - Hi, Odeta. I sure have, and I’m glad you called it outdated because that advice made a lot of sense during the four-decade stretch of declining mortgage rates that ended just a few years ago. Buyers could lock in a rate and refinance later at a lower one. That long-run rate decline helped fuel a lot of housing turnover.

Odeta Kushi - Yeah, I mean, consider this—it was 18% in 1981 and then fell steadily until 2022, when rates went back up. Since then, they’ve hovered between 6.5% and 7%. And according to first quarter 2025 data from the National Mortgage Database, 81% of existing homeowners have a mortgage rate below 6%. If you haven’t guessed it by now, today’s episode is all about mortgage rates.

Mark Fleming - Exactly.

Odeta Kushi - How they’re determined, where they might be headed for the rest of the year, and whether changes in rates will really drive housing market activity in the second half of the year.

Mark Fleming - Spoiler alert—we don’t think so.

Odeta Kushi - That’s right. So let’s start with the basics. How are mortgage rates actually set?

Mark Fleming - Contrary to popular belief, mortgage rates aren’t set by the Federal Reserve. The Fed influences short-term interest rates, but mortgage rates—especially the 30-year fixed-rate mortgage—tend to follow the yield on the 10-year Treasury note.

Odeta Kushi - Right, and that 10-year yield reflects investor expectations about inflation and economic growth, along with factors like geopolitical conditions. Lenders then add a spread to that yield to account for the risks of investing in mortgage-backed securities, or MBS. We even have an entire episode dedicated to explaining the spread, episode 71, plus a few blog posts. Definitely worth checking out.

Mark Fleming - Mm-hmm. Yes, and historically that spread has averaged around 1.7 to 2 percentage points. If the 10-year Treasury is at 4.5%, mortgage rates might land somewhere around 6.2%. But that spread isn’t fixed—it can widen or narrow depending on market conditions.

Odeta Kushi - Exactly. For example, during periods of financial stress or uncertainty—such as the banking sector jitters in early 2023 —spreads widened. They actually peaked at 3.15 percentage points in May 2023 but have since narrowed to 2.44. That makes a big difference. Consider this: the 10-year was about 4.2% in the week ending August 8. If spreads were still at 3.15 percentage points, the 30-year fixed mortgage rate would be over 7% right now.

Mark Fleming - Yes, and conversely, if the spread were back to the historical norm of 1.7 percentage points, mortgage rates would actually be below 6% today.

Odeta Kushi - That would be so nice. But instead, we’re somewhere in the middle with a rate of 6.7%. From that peak in 2023, spreads have narrowed as inflation cooled and market volatility eased, which allowed mortgage rates to come down—even while the 10-year yield remained elevated.

Mark Fleming - True, though we’re not expecting the spread to return to its long-run average this year. For reasons we discussed in that earlier episode, the Fed is unlikely to become a major MBS buyer again. And slower prepayment rates and longer durations on mortgages are probably here to stay.

Odeta Kushi - And if you have no idea what we mean by that—seriously, check out that earlier episode, we break it all down there. But that brings us to the next question: where are mortgage rates headed for the rest of the year?

Mark Fleming - Exactly, the question on everyone’s mind. Since mortgage rates are tied to the 10-year Treasury, which is influenced by so many factors, there’s no way to know for sure. But we can highlight what could push rates higher or lower. Higher inflation or inflation expectations could push yields—and mortgage rates—up.

Odeta Kushi - Yeah, definitely.

Mark Fleming - Conversely, a weaker economy or labor market might pull yields down—and with them, mortgage rates. Classic economist answer: on the one hand, on the other hand.

Odeta Kushi - True. But let’s be honest—if anyone expects us to have a point forecast for mortgage rates, that’s nearly impossible. Industry forecasts suggest the 30-year fixed mortgage rate will average around 6.6% by year-end, with a range between 6.4% and 6.7%. Futures prices as of early August implied about 6.4% by year-end.

Mark Fleming - They’re crazy.

Odeta Kushi - And some of the recent decline in rates earlier this August was tied to a weaker jobs report, along with downward revisions to that report. Markets took that as a sign of a cooling labor market and increased their expectations that the Fed would cut rates at its September meeting.

Mark Fleming - Right now, in mid-August, market odds of the Fed cutting by 25 basis points in September are at 96%. That’s essentially a sure thing, up from 64% in early July. So those recent data reports have definitely shifted expectations.

Odeta Kushi - And mortgage rates fell on that news. We’ve seen this before—rates often move ahead of Fed action.

Mark Fleming - That’s right. In mid-2024, mortgage rates dipped before the Fed’s 50 basis point cut in September. Markets anticipated easing, and rates responded early. We’re seeing a similar pattern now. Rates have softened slightly since the July jobs report hinted at a cooling labor market.

Odeta Kushi - But it can work the other way, too. Just because the Fed cuts rates doesn’t mean mortgage rates will fall. We saw that last year, mortgage rates actually increased after the Fed cut, because they had already fallen in anticipation of the move.

Mark Fleming - Exactly. It all comes back to the 10-year yield. If investors aren’t convinced inflation is under control, you’ll see that reflected in higher yields.

Odeta Kushi - And there are still a lot of unknowns around inflation right now. We need to see how tariffs impact inflation in the second half of the year, how labor market conditions evolve, and, of course, how the Fed balances its two goals: maximum employment and price stability—when those are in tension.

Mark Fleming - All of this uncertainty is why most economists don’t expect mortgage rates to move much. We’ve already seen a modest decline thanks to the July jobs report, but even that hasn’t pushed rates below 6.6%.

Odeta Kushi - So when it comes to the second half of 2025, is it really all about rates?

Mark Fleming - I thought you’d never ask, Odeta. Listeners may be surprised to hear me say—not really. While lower rates might help convince a buyer or seller at the margin, they’re unlikely to unlock the majority of potential sellers. Remember, 81% of existing homeowners today have a rate below 6%. Even if rates fell to 6.4%, most wouldn’t be incentivized to sell.

Odeta Kushi - To test that assumption, I did a simple analysis to see how rate-sensitive buyers really are in today’s market. I looked at the relationship between purchase mortgage applications and the 30-year, fixed rate from 1990 through today and identified eight different historical regimes. I’ll walk through them quickly:

• Early 1990s recession.
• The late ’90s boom (1995–2001).
• The housing bubble (2002–2006).
• The global financial crisis and recovery (2007–2012).
• The post-GFC norm (2013–2019).
• The ultra-low rate era (2020–2021).
• The rising rate regime (2022–2023).
• And now, 2024 onward—the high plateau.

What we found is that today’s market is among the least rate-sensitive periods. By contrast, the most rate-sensitive was 2020–2021.

Mark Fleming - I love the names you’ve given these. It makes total sense. During the ultra-low rate period, moving was easy because rates encouraged turnover. But today, it would take a dramatic drop from this high plateau to entice homeowners to move. And that challenge is compounded by broader economic and labor market uncertainty.

Odeta Kushi - Exactly—and that brings us to what we’re calling the dual lock-in effect. The first is the familiar rate lock-in. Many homeowners refinanced during the pandemic and now enjoy ultra-low rates—averaging 4.1% for outstanding mortgages. With current rates closer to 7%, moving means trading a low monthly payment for a much higher one. That’s a powerful disincentive to sell, and it’s slowed turnover in the existing home market.

But there’s another lock-in—the labor market. While unemployment remains low, the job-hiring rate has fallen to 2013 levels, when unemployment was about 7%. Job changes often trigger household moves. With fewer people switching jobs, there’s less incentive to relocate, which reduces both buying and selling

activity.

Mark Fleming - Yes, and beyond the labor market, there’s broader macroeconomic uncertainty unsettling potential buyers and sellers. According to a June 2025 survey by the New Home Trends Institute, nearly half of respondents said they’re delaying home purchases due to economic uncertainty. It’s a reminder that sentiment, not just fundamentals, plays a major role in today’s housing dynamics.

Odeta Kushi - My goodness, negative, negative, negative. It's a lot. I think that's enough on the negative talk.

Mark Fleming - I know. Whomp whomp. Yeah, it has been a bit of a cruel summer for housing. Get it?

Odeta Kushi - Okay, usually when you say “get it,” it’s because you’re making an ’80s reference. But when I hear Cruel Summer, I think of Taylor Swift’s 2019 hit from Lover.

Mark Fleming - What? Now I don’t get it. Taylor who? I’m not sure who that is.

Odeta Kushi - Careful, Mark. The Swifties will come for you. She just announced a new album—these are dangerous times to cross her fan base.

Mark Fleming - Oh, I know what a Swiftie is. And I know better than to cross them. But I was actually referring to Cruel Summer, the 1983 hit by Bananarama.

Odeta Kushi - Okay, if you say so. But we’re adding both songs to the REconomy playlist—it’s looking a little sparse right now.

Mark Fleming - Fair enough. And you’re right, we’ve been a little negative, so let’s move on. There are reasons to be positive, too. Real estate moves in cycles. Existing-home sales have hit a cyclical trough because of everything we’ve discussed, but that means we may be at the start of a new cycle. Sales activity has stabilized near a 4-million annualized pace, suggesting the market has found its floor.

Odeta Kushi - Yes.

Mark Fleming - And from here, even modest gains will signal the early stages of recovery. But if not rates, what will drive that recovery?

Odeta Kushi - I’m glad you asked. We believe more sales will be driven by life events—the 5 Ds: diplomas, diapers, divorce, downsizing, and death. Listen to episode 119 from our Summer School series for more on this. Of course, lower rates would help, but we can’t rely on them as the main driver this time around.

Mark Fleming - Exactly. Instead, we’re already seeing more sellers listing and inventory rising. Life happens regardless of mortgage rates. That increase in inventory is helping ease price pressures and giving incomes a chance to catch up again.

Odeta Kushi - Right. We often forget that affordability is about more than just mortgage rates. It’s also about incomes and house prices. Nationally, price appreciation has slowed to the low single digits. In some Southern and Western markets, prices have even declined compared to a year ago. So we’re seeing a gradual—and in some places, more than gradual—shift toward a more buyer-friendly market.

Mark Fleming - Exactly. And, on that more positive note, it feels like a good place to wrap up the episode—with a little cautious optimism. From Cruel Summer to Autumn Almanac.

Odeta Kushi - No, no. You don’t get to claim that one as an ’80s reference. That’s the 1960s, long before your time. I have to protect our listeners, can’t have them thinking that was from your favorite decade.

Mark Fleming - Drat. I really thought I could sneak that one in. You caught me—it’s before my time too.

Odeta Kushi - And with that, thank you all for joining us on this episode of the REconomy Podcast. If you have an economics question you’d like us to cover in a future episode, you can email us at economics@firstam.com. And, as always, if you can’t wait for the next episode, you can follow us on X. I’m @OdetaKushi, he’s @FlemingEcon. Until next time.

Thank you for listening, and we hope you enjoyed this episode of The REconomy Podcast™ from First American. We're pleased to offer you even more economic content at firstam.com/economics. This episode is copyright 2025 by First American Financial Corporation. All rights reserve