Mortgage Rate Volatility and Its Impact on Housing Market Momentum

The U.S. housing market has entered a phase of recalibration, shaped by the interplay of mortgage rate volatility and shifting economic dynamics. For income-focused investors, understanding these trends-and their implications for fixed-income strategies and housing sector exposure-is critical to navigating a landscape marked by both challenges and opportunities.

Mortgage Rate Trends and Housing Market Momentum

Mortgage rates have retreated from their 2023 peaks but remain elevated relative to historical norms. As of December 2025, the 30-year fixed-rate mortgage
, down from 6.69% a year earlier, signaling a gradual easing of borrowing costs. This moderation has
spurred a modest recovery in housing activity, . However, affordability constraints persist.
The Housing Affordability Index fell below the breakeven threshold of 100 in May 2025, indicating that the typical family no longer earns enough to qualify for a median-priced home at current rates.

The "lock-in effect" further complicates market momentum. Homeowners with low fixed-rate mortgages are hesitant to sell, given the risk of higher borrowing costs, while first-time buyers face barriers to entry.
According to Milliman analysis, meanwhile, inventory levels have risen but remain constrained, and single-family housing starts and permits have declined year over year, reflecting reduced builder confidence. Analysts
project further rate cuts in 2026, which could ease affordability pressures and stimulate home sales, but the path to recovery remains uneven.

Fixed-Income Strategies in a Volatile Rate Environment

For fixed-income investors, mortgage rate volatility demands a recalibration of traditional strategies.
The yield curve's lack of term premium and heightened interest rate uncertainty counsel caution toward longer-duration bonds. Instead, active selection and high-quality income instruments-such as short- to intermediate-term Treasuries and investment-grade corporate bonds-offer more resilient returns.
The belly of the yield curve (e.g., 5- to 10-year maturities) is expected to outperform in 2025, as curve steepening gains traction.

Mortgage-backed securities (MBS) present a nuanced opportunity. While rising rates have dampened prepayment risks-a tailwind for MBS yields-the sector remains sensitive to refinancing demand and housing market fundamentals.
According to Milliman analysis, investors should prioritize high-quality MBS with strong collateral and avoid overexposure to agency securities, which face valuation risks amid prolonged rate uncertainty.

Housing Sector Exposure: Balancing Risks and Opportunities

The housing sector's performance is increasingly tied to macroeconomic forces, including inflation, tariffs, and immigration policy.
Large-scale tariff increases, for instance, could exacerbate mortgage rate volatility by inflating long-term interest rate expectations. Similarly, reduced immigration-a potential policy shift-may depress demand for housing, particularly in multifamily markets.
According to JPMorgan analysis, multifamily properties have benefited from a shift in demand away from single-family homes, driven by high mortgage rates pricing buyers out of the market. However, gains are uneven: while mortgage lenders returned to profitability in Q2 2025, ,
broader ETF performance remains constrained by affordability challenges and inventory bottlenecks.

Conclusion

The housing market's trajectory in 2025 hinges on the delicate balance between moderating mortgage rates, affordability constraints, and macroeconomic uncertainties. For fixed-income investors, the path forward requires a dual focus: leveraging curve steepening and high-quality income instruments while carefully managing exposure to housing sector risks.
As the Federal Reserve's policy outlook shifts from a "soft landing" to a "no-landing" scenario, strategic agility-coupled with a disciplined approach to duration and credit quality-will be paramount. In this evolving landscape, the key to success lies in aligning portfolio allocations with both the opportunities and headwinds of a market in transition.