Economists at Fannie Mae have scaled back their forecast for 2025 and 2026 sales by a total of 222,000 homes, as their outlook for economic growth to slow and inflation to rise could mean mortgage rates come down more slowly than previously expected.
While forecasters at the mortgage giant still expect mortgage rates to come down to 6.5 percent by the end of this year and 6.1 percent next year, that’s a slightly less optimistic prediction than July’s forecast.
Last month Fannie Mae economists were forecasting that mortgage rates would hit 6.4 percent by the end of this year and 6 percent by the end of 2026. Driving the revised forecast are expectations for slighter cooler economic growth and hotter inflation.
Fannie Mae economists expect 2025 real gross domestic product (GDP) growth of 1.1 percent this year, down from 1.3 percent in July. The consumer price index (CPI), a key inflation gauge, is now expected to rise to 3.3 percent annually in Q4, up from Fannie Mae’s forecast of 3 percent in July.
Home sales forecast revised down by 220,000 homes
Source: Fannie Mae housing forecast, August 2025.
The latest Fannie Mae forecast is that 4.74 million homes will change hands this year, or 107,000 fewer than predicted in July, and for 5.23 million home sales in 2026, a downward revision of 115,000 homes.
“The economy has slowed decisively this year, with GDP growth averaging 1 1/4 percent in the first half, down from 3 percent in the previous three years,” economists at Pantheon Macroeconomics said Monday in a monthly chartbook report examining macroeconomic trends. “Consumers have driven the slowdown, reining back growth in their real spending to a mere 1 percent pace so far this year.”
Pantheon’s forecast is for the unemployment rate to rise to 4.75 percent by the end of the year, and for the jobs outlook to worry Federal Reserve policymakers more than tariff-fueled inflation.
“Optimists argue the rebound in stock prices, clarity over the outlook for fiscal policy following the inking of the One Big Beautiful Bill Act and a shrinking of the range of tariff scenarios, following the signing of trade deals with several major partners, will help the economy regain momentum soon,” Pantheon economists said. “This is wishful thinking.”
Mortgage rates touched a 4-month low last week, with investors anticipating that Fed policymakers will respond to deteriorating jobs numbers by slashing short-term interest rates at their three remaining meetings this year.
With unemployment on the rise and tariffs helping push inflation further away from the Fed’s 2 percent target, Pantheon’s forecast is that the central bank will cut short-term rates by 75 basis points this year and by another 75 basis points in 2026.
A basis point is one hundredth of a percentage point, so a 150-basis-point reduction in the federal funds rate would bring short-term interest rates down by 1.5 percentage points. That could provide relief for small businesses and consumers repaying credit card debt at rates that are benchmarked to the short-term federal funds rate.
Long-term interest rates are another story, since they’re determined by investor demand for government bonds, mortgage-backed securities (MBS) that fund most home loans.
The last time the Fed cut rates, at the end of 2024, mortgage rates moved in the opposite direction when inflation refused to be tamed.
But Pantheon’s forecast is for 10-year Treasury yields — a barometer for mortgage rates — to drop by roughly half a percentage point this year, and by 3/4 of a percentage point by June 2026.
Mortgage rates expected to dip
Source: Fannie Mae housing forecast, August 2025.
Forecasters at Fannie Mae and the Mortgage Bankers Association expect mortgage rates to fall more gradually.
The MBA’s latest forecast, issued in July, predicted mortgage rates would still be at 6.7 percent in Q4 2025 and 6.4 percent at the end of 2026.
Homebuilders pull back on single-family starts
Source: Fannie Mae housing forecast, August 2025.
Fannie Mae economists expect homebuilders will start construction on 931,000 single-family homes this year, which would be 8 percent fewer than last year. New single-family home construction is expected to rebound by 2 percent next year, to 948,000.
Single-family housing starts were up 2.8 percent from June to July, hitting a seasonally adjusted annual rate of 939,000, the Census Bureau reported Tuesday.
But single-family housing starts hit an 11-month low in June and are likely to fall “much further in coming quarters,” Pantheon Macroeconomics Senior U.S. Economist Oliver Allen said in a note to clients.
Oliver Allen
“Homebuilders’ confidence has collapsed since January, according to the NAHB [National Association of Home Builders] expected sales index, amid still high mortgage rates, growing competition as the number of existing homes for sale has continued to recover and resulting weakness in new home sales,” Allen said.
Housing affordability is “central to the outlook for economic growth and inflation,” NAHB Chief Economist Robert Dietz said in a statement.
“Given a slowing housing market and other recent economic data, the Fed’s monetary policy committee should return to lowering the federal funds rate, which will reduce financing costs for housing construction and indirectly help mortgage interest rates.”
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