December 30, 2025 – Where The Fed Stands Entering 2026

Economic Commentary

The Federal Reserve lowered their benchmark interest rates three times to close out 2025. While this was good news for the real estate markets, the path to lower rates has not been as clear as many would have hoped in light of the Fed activity.  The disconnect has occurred despite major pressure on the Fed to lower rates significantly from the Administration and a clear slowdown in the labor markets. 

 Fed Chairman Powell had a lot to say after their last meeting in December. He acknowledged that the economy, especially the jobs picture, has gotten weaker. But he also pointed to the fact that inflation, while down significantly from its post-pandemic peaks, has not improved much in 2025. He cited the influence of tariffs upon inflation and also expressed the hope that tariff induced inflation would be a temporary factor.   Stubborn inflation and a slowing economy puts the Fed in the unenviable position of fighting two conflicting enemies attacking from two completely opposite vantagepoints. Lower rates can exacerbate the inflation picture, but higher rates can stifle the economy even further. 

 Here is the good news regarding the real estate sector. Mortgage rates have come down during the past few months and this factor has increased real estate activity. And there is potential for further decreases in the coming months, regardless of the fact that the Fed may stay neutral early in 2026.  Most prognosticators are predicting that rates will ease in 2026, but the easing is supposed to be gradual and limited in scope.  For those looking to purchase a home this year, each drop in rates is a positive sign. Even more important, every decrease in mortgage rates brings us closer to loosening up the lock-in effect.  This phenomenon keeps sellers from listing their homes because they have a low rate on their present mortgage. Let’s hope for more progress in 2026!

Weekly Interest Rate Overview

The Markets. Mortgage rates moved slightly lower last week, despite the release of data showing strong economic growth for the third quarter accompanied by increased inflation. According to the Freddie Mac weekly survey, 30-year fixed rates fell to 6.18% last week from 6.21% the previous week. In addition, 15-year loans increased to 5.50%. A year ago, 30-year fixed rates averaged 6.85%, 0.67% higher than today. Attributed to Freddie Mac: “The average 30-year fixed-rate mortgage decreased further this week. Declining rates offer a timely and welcome gift for aspiring homebuyers.” Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Real Estate News

Many homeowners who managed to snag mortgage rates well below today’s levels are staying put to avoid sharply higher monthly payments—and some of the nation’s priciest markets are feeling the strain of this deepening “lock-in effect.” Nationally, the typical U.S. mortgage holder pays about $1,300 in principal and interest per month. If they were to purchase a home today, that payment would jump by more than 73%, or $1,000, according to a new report on America’s “locked-in” homeowners from Realtor.com® researchers.  Here’s how the U.S. housing market ended up in this predicament: At the height of the pandemic, mortgage rates hit record lows as homebuyer demand soared, fueling a boom in purchase and refinance activity.  As a result of these shifts, more than one-quarter of all outstanding mortgages originated since 1995 were opened or refinanced at lower rates during 2020 and 2021. When mortgage rates began climbing again in 2022, both homebuying and refinancing dropped off a cliff, leaving many homeowners feeling “locked in” to their lower rates.  Simply put, homeowners holding on to the pandemic-era rates now find themselves unwilling or unable to sell, because doing so would require taking out a new mortgage at a much higher rate, significantly increasing their financing costs. Nationally, 80.3% of current mortgages carry rates below 6%, and nearly one-third (32.1%) of outstanding mortgages have an interest rate between 3% and 4%.  The “lock-in effect” is not happening in a vacuum: It not only slows home-selling activity but also reshapes the entire housing market in a given location.  According to researchers, when a large percentage of homeowners hold mortgages well below the current rates, they are understandably hesitant to list their homes, leading to chronically low inventory levels, sluggish home and job mobility, and weaker turnover, which limits options for first-time buyers.  Tight inventory keeps prices high despite softening demand and leaves people in homes that don’t meet their lifestyle needs.  Source: Realtor.com

Investor activity stayed steady through mid-2025. In the second quarter, investors bought about 11% of all homes sold, roughly the same as last year, according to Realtor.com. Overall home sales dropped about 4%, but investor purchases slipped only 3%, giving investors a slightly bigger piece of the market.  At the same time, investor selling slowed. They sold around 216,000 homes in the first half of the year, down just over 4% from 2024. That means investors still bought more homes than they sold (about 21,000 more in Q2), showing continued confidence in the rental market.  The biggest change this year is who’s buying. Small investors, such as local buyers adding a few rental properties, made up about 63% of investor purchases, the highest share in nearly two decades. Large investors, including corporations, pulled back and accounted for only about one-fifth of investor purchases. Investor activity is strongest in lower-cost markets. Nationally, the typical investor home cost $287,000, about $80,000 less than the median U.S. sale price. That means investors are mostly competing in the same affordable price range as many first-time buyers.  With mortgage rates still high and rent demand remaining steady, investors (especially smaller ones) are likely to stay active in 2026, keeping competition strong in lower-cost housing markets in particular.  Source: MP Daily

The latest homeownership rate rose to 65.3% in the third quarter of 2025, according to the Census’s Housing Vacancy Survey (HVS). Despite this quarterly increase, the trend continues to reflect significant affordability challenges. With mortgage interest rates remaining elevated, and housing supply still tight, housing affordability is at a multidecade low. Compared to the peak of 69.2% in 2004, the homeownership rate is currently 3.9 percentage points lower and remains below the 25-year average rate of 66.3%.  Compared to the previous year, homeownership rates increased in three age groups. Among younger households, the homeownership rate for those under 35 increased 0.5 percentage points to 37.5% in the third quarter of 2025. This age group is particularly sensitive to mortgage rates and the inventory of entry-level homes. Householders ages 45-54 experienced a 0.3 percentage-point increase from 69.7% to 70%. Homeownership rates for householders aged 55-64 inched up by 0.1 percentage point over the same time. However, homeownership rates for householders aged 35-44 and those over 65 years each declined 1.2 percentage points from a year ago. The total number of households increased to 133.1 million in the third quarter of 2025 from 132.0 million a year ago. This increase was driven by both owner and renter household growth. The number of renter households rose by 0.7 million, while owner-occupied households increased by 0.4 million over the same period.  Source: NAMB Eye on Housing