Where Do Mortgage Rates Go From Here?
Future mortgage rate trends depend on the Fed’s balance sheet policy. Slower mortgage-backed securities runoff could lower rates, while faster reductions might raise them temporarily. Eventually, as MBS holdings stabilize or deplete, rates should normalize.
Since reaching a 2025 calendar year peak exceeding 7 percent in January, the average 30-year mortgage rate fell to 6.19 percent in late October before spiking again roughly 20 basis points following the Federal Reserve’s (Fed’s) October Federal Open Market Committee (FOMC) meeting. While a general decline in rates brought momentary relief to the housing market, recent changes in Federal Reserve policy will impact where rates go from here.
On October 29, the FOMC announced a 25 basis point reduction in its target rate, which primarily affects short-term interest rates. While changes in this rate can indirectly affect long-term rates, such as the 10-year Treasury yield and 30-year mortgage rates, the effect is typically smaller. However, the Fed also trades long-term assets, including long-term Treasurys and mortgage-backed securities (MBS), directly influencing rates in the respective markets in what is known as the Fed’s balance sheet policy.
While the Fed reduced its offloading of Treasurys in April 2025, it did not do the same for its holdings of MBS. Rather, the Fed continued to allow roughly $17 billion of MBS to roll off its balance sheet (through receipts of regular mortgage payments) each month. Since private sector investors must, in the aggregate, grow their holdings of mortgages by the amount of Fed reduction (plus any natural growth in mortgage loans), this places upward pressure on mortgage rates.
Notes: The numerator is the total agency-backed securities held by the Federal Reserve (FRED series WSHOMCB). The denominator is the sum of residential mortgages of 1-4 family residences (FRED series ASHMA) and multifamily residences (FRED series ASMRMA).
Source: Board of Governors of the Federal Reserve, FRED, and author’s calculations
Along with the October rate cut, the Fed announced a change in its balance sheet policy, where it would fully cease its asset reduction on a net basis. In doing so, it would continue to shrink its MBS holdings as principal mortgage payments accrue and reinvest that revenue in short term Treasury assets (i.e., reallocating the Fed’s portfolio toward Treasurys and away from MBS).
So, how will Fed policy impact mortgage rates? Immediately after the rate cut announcement, both mortgage rates and the 10-year Treasury yield surprisingly increased, possibly reflecting the uncertain outlook on future rate cuts indicated by Fed Chair Jerome Powell.
However, changes to the balance sheet policy may begin putting downward pressure on mortgage rates over time. Despite not changing its policy on MBS holdings, the broader impact of stabilizing the Fed balance sheet eases total debt absorption by the private sector, which places downward pressure on all interest rates. Consequently, although interest rates increased immediately after the Fed announcement, they may begin to decline in the coming months.
As we look to the future of mortgage rates and other interest rates beyond the next few months, the path of rates hinges on the evolution of Fed balance sheet policy. If the Fed pivots towards easing its MBS runoff, then mortgage rates will likely decline. Conversely, if the Fed accelerates this asset reduction by selling MBS—an unlikely scenario—then higher mortgage rates could be sustained for a period. Eventually, however, the Fed will either stabilize or exhaust its stock of MBS, then rates will normalize.
Views expressed on The 338 are those of the authors and do not imply endorsement by the Texas Real Estate Research Center, Division of Research, or Texas A&M University.
