Mortgage Rates Hit Multi-Year Lows: Assessing the Sustainability of the Housing Rebound

Mortgage rates have broken through a key psychological barrier, with the average 30-year fixed rate hitting 6.037% as of January 9. That's the lowest level for this loan type since mid-September 2024, marking a clear shift from the prolonged period above 7% that dominated much of 2025. This recent slide is the direct result of the Federal Reserve's aggressive pivot. The central bank delivered three consecutive 25-basis-point rate cuts, culminating in the December reduction that brought the federal funds rate to a range of 3.5%–3.75%. The easing cycle has finally begun to flow through to the mortgage market.

The transmission mechanism has been aided by a narrowing spread. As the Fed's benchmark rate fell, the gap between that rate and the yield on the 10-year Treasury-a key benchmark for mortgage pricing-has compressed. This convergence has allowed mortgage rates to fall more sharply than the Fed funds rate itself, providing a significant boost to housing affordability. The move is a classic response to a softening economic backdrop, with the December jobs report showing private sector job growth slowed and the three-month average turning negative.

Yet the outlook for 2026 is clouded by division. The Fed's own December meeting minutes revealed policymakers were split on the balance of risks, with some fearing inflation could re-accelerate and others pushing for more aggressive cuts to support a cooling labor market. This internal debate is reflected in the updated "dot plot," which shows a wide dispersion of views on the path for rates next year. The median projection calls for one more cut, but the lack of consensus creates uncertainty. For now, the slide is real, but its sustainability hinges on whether the Fed can maintain its easing trajectory without triggering a new bout of volatility.

Immediate Market Impact: Demand Rebounds, But Affordability Limits the Boom

The immediate effect of lower rates is a clear rebound in housing demand. Purchase applications have surged, rising over 20% from a year ago in the first week of the new year. More specifically, the Mortgage Bankers Association's purchase index jumped nearly 16% last week to its second-highest level since early 2023. This is the classic response to a drop in financing costs: cheaper mortgages are unlocking pent-up buyer interest.

Yet the broader market is not yet in a full-blown boom. The pace of home price growth has moderated sharply, slowing to just 1.0% year-over-year in November. This deceleration is a direct result of the affordability squeeze that persisted through 2025. Even with lower mortgage rates, the sheer level of price growth had priced many buyers out of the market. The recent slide in rates is helping, but it is not a magic bullet for a market where prices remain elevated.

A key structural shift is weakening the so-called "lock-in effect." This phenomenon, where homeowners stay put because they have a low-rate mortgage, is steadily disappearing. As economist Lawrence Yun notes, life-changing events are making more people list their property to move on. This is a positive development for market liquidity, as it brings more homes onto the market. Inventory levels are indeed about 20% above one year ago, providing more choices for consumers.

Still, the supply story remains regional and uneven. While national inventory is improving, the market is not yet at a balanced state. Economists expect a slight housing shortage condition to persist, meaning competitive conditions could flare up in desirable metros. The bottom line is that lower rates are providing a powerful tailwind for demand, but the rebound is being tempered by a market that has yet to fully shed its affordability constraints. The spring buying season will be the true test of whether this momentum can translate into sustained, broad-based activity.

Sustainability and Risks: The Path to a Lasting Rebalance

The rebound in housing activity is now in the balance. Its sustainability depends on a delicate sequence of events, with the Federal Reserve's easing cycle being the primary catalyst. The central bank has already delivered three consecutive 25-basis-point rate cuts, and its updated "dot plot" suggests a median expectation for one more reduction in 2026. Our base case is that we will get one further 25-basis-point rate cut by the end of the first quarter. This incremental easing is predicated on the view that US inflation is likely to peak in the second quarter, before stabilizing toward the Fed's 2% target. If that trajectory holds, lower mortgage rates will continue to support buyer demand and help rebalance the market.

Yet a significant risk threatens to derail this path. Inflation in essential categories remains stubbornly elevated, a situation economists attribute in part to policy. As Mark Zandi noted, inflation for staples, necessities, remains elevated, with tariffs having pushed up the rate by a little over half a percentage point. While the pass-through to consumer prices has been more muted than feared, this persistent pressure in groceries and services creates a clear vulnerability. It could force the Fed to pause its easing cycle, even as the labor market shows signs of softening. The internal division within the FOMC, highlighted by the wide dispersion of views on the path for rates in 2026, means the central bank is not yet on a firm, consensus-driven path. Any data suggesting inflation is re-accelerating could quickly shift the debate.

The market's strength will be tested in the coming months. Watch for the pace of new home sales and price gains in early 2026, particularly in the Midwest and other affordable hubs. These regions are likely to see the most pronounced impact from lower rates, making them a key indicator of whether the rebalancing is broad-based or concentrated. Lawrence Yun's forecast for a 14% nationwide increase in home sales in 2026 hinges on this dynamic. The recent surge in purchase applications is a promising start, but it must translate into sustained volume and a more even distribution of activity across the country.

The bottom line is that the current improvement is a response to a specific policy shift. For it to become a lasting rebalance, that policy must continue to work, and the inflation outlook must align with the Fed's projections. The coming quarters will reveal whether the easing cycle can proceed smoothly enough to support a durable housing recovery, or if persistent price pressures force a recalibration of expectations.

2026 Outlook: Regional Scenarios and Sector Implications

The rebound in housing activity is not a uniform wave. Its impact will vary dramatically across market segments and geographic regions, creating a landscape of winners and laggards. The most immediate and powerful effect is a surge in refinancing. The MBA's refinancing index jumped by more than 40%, the largest weekly increase since September. This spike is a direct cash flow injection for existing homeowners, freeing up discretionary income that can support broader economic activity. Yet for the housing market itself, this activity is a transfer of wealth within the existing owner base, not new demand for homes.

The true test of a lasting rebalance lies in purchase demand, and here regional disparities are already clear. Economists point to a reawakening in home sales, with Lawrence Yun forecasting a 14% nationwide increase in 2026. But that national average masks significant divergence. Demand is favoring areas that combine economic opportunity with relative affordability. Markets like Columbus and Indianapolis are emerging as hotspots, where university presence and lower price points are attracting buyers who were priced out of coastal metros. This shift is a structural correction, as buyers seek value in more affordable, university-adjacent hubs.

Price growth will follow a similar uneven path. National home price growth has moderated to a 1.0% year-over-year pace in November, with economists expecting minimal gains of 2% to 3% for the year. However, the spring buying season could spark a re-acceleration of price gains in specific markets. As Cotality's Chief Economist Dr. Selma Hepp notes, a drop in rates could unleash pent-up demand, but with supply still constrained in many regions, buyers may face competitive conditions, especially in desirable metros. This sets up a dynamic where price re-acceleration is likely to be concentrated in markets with limited inventory, while broader affordability gains support sales volume.

The bottom line is that 2026 will be a year of selective recovery. The national sales forecast of 14% growth is achievable, but it will be driven by a shift in geographic and demographic demand. The refi boom provides a near-term liquidity boost, while the purchase rebound will be strongest in more affordable, dynamic markets. For investors and policymakers, the key will be navigating this regional divergence, where the path to a sustained housing recovery is paved not by a single policy, but by a patchwork of local conditions and buyer priorities.