The Strategic Case for Real Estate and MBS in a Low-Rate Era: 2025 Trends and Investment Opportunities

The U.S. housing market and bond landscape in 2025 have been shaped by a pivotal shift in mortgage rate dynamics. After years of historically high borrowing costs, the 30-year fixed-rate mortgage averaged 6.15% by December 2025, a decline of 76 basis points from its 6.91% annual average in 2024. This downward trajectory, driven by Federal Reserve rate cuts in late 2024 and broader economic stabilization, has created a unique inflection point for long-term investors. As mortgage rates approach multi-year lows, the interplay between housing demand, home equity growth, and Treasury yield movements signals a compelling opportunity to position capital in residential real estate and mortgage-backed securities (MBS).

Mortgage Rate Trends: A New Equilibrium

The 2025 mortgage rate decline reflects a recalibration of market expectations. Starting the year near 7%, rates gradually fell to 6.25% by October 2025, with the Federal Reserve's aggressive policy adjustments playing a central role. Three rate cuts in September, October, and December 2024 injected stability into a market previously plagued by volatility. This trend aligns with the historical relationship between the 10-year Treasury yield and mortgage rates, which typically maintain a spread of 2.1–2.3 percentage points. For instance, when the 10-year yield hit 4.14% in late 2025, the 30-year mortgage rate followed at 6.18%, reflecting a spread of 2.04 percentage points. While Treasury yields remain elevated due to inflationary pressures, the narrowing gap between mortgage rates and Treasuries suggests a more favorable borrowing environment for homebuyers.

Stimulating Housing Demand and Home Equity Growth

The decline in mortgage rates has directly influenced housing market activity. Despite persistently high home prices, the National Association of REALTORS® reported a 1.2% increase in existing-home sales in 2025, with mortgage applications surging 26% year-over-year. This uptick is partly attributable to record home equity levels, which have enabled move-up buyers to leverage their equity for subsequent purchases. As of October 2025, home equity growth reached its highest level since the pandemic, driven by sustained price appreciation (3.5% annual growth) and refinancing activity. Lower rates have also improved affordability for first-time buyers, particularly as inventory levels rose 10% year-over-year, providing more negotiating power.

However, challenges remain. Elevated real estate taxes and limited inventory for entry-level homes continue to constrain demand. Yet, the trajectory of mortgage rates-projected to stabilize or decline further in 2026-positions the housing market for a gradual but meaningful recovery. For investors, this environment offers a dual benefit: appreciation potential in residential real estate and increased liquidity from refinancing activity.

Bond Market Implications: The Treasury-Mortgage Nexus

The relationship between Treasury yields and mortgage rates carries broader implications for the bond market. In 2025, the 10-year Treasury yield remained above 4.1%, reflecting investor expectations of "higher-for-longer" interest rates. This dynamic has kept mortgage rates elevated but has also created a more predictable yield curve, which benefits long-term fixed-income investors. The Federal Reserve's potential actions-such as halting the reduction of its mortgage-backed securities (MBS) holdings-could further compress mortgage spreads by 20–30 basis points, lowering borrowing costs and enhancing housing affordability.

For bond investors, the current environment favors assets with strong relative value. Agency MBS, for example, are expected to outperform Treasuries in 2026 due to tighter corporate credit spreads and a rangebound rate environment. Additionally, the bond market's return to pre-quantitative easing liquidity patterns suggests that market forces, rather than central bank interventions, will increasingly dictate yield movements. This shift underscores the importance of diversifying fixed-income portfolios with assets like MBS, which offer both income and capital appreciation potential.

The Investment Case for MBS and Residential Real Estate

Mortgage-backed securities have emerged as a strategic asset class in 2025's low-rate environment. Agency MBS securitizations surged 10.6% year-over-year in Q2 2025, driven by a 63% increase in refinancing activity. While prepayment risks persist-particularly in a sustained refinance wave-investors can mitigate these by focusing on securities with strong prepayment characteristics and diversifying across the yield curve. The Federal Reserve's potential policy easing and regulatory support for Fannie Mae and Freddie Mac to expand their portfolios further enhance MBS' appeal.

For residential real estate, the combination of low rates and rising home equity creates a favorable backdrop for long-term gains. Refinancing activity has already demonstrated profitability for lenders, with average earnings of $950 per loan in Q2 2025. As mortgage rates stabilize, first-time buyers and move-up buyers are likely to drive sustained demand, particularly in markets with growing inventory. Investors should prioritize properties in regions with strong job growth and demographic tailwinds, where appreciation potential is likely to outpace national averages.

Conclusion: A Strategic Entry Point

The convergence of declining mortgage rates, moderate home price growth, and a stabilizing bond market presents a rare opportunity for long-term investors. By leveraging the current low-rate environment, capital allocated to residential real estate and MBS can benefit from both income generation and appreciation potential. While risks such as prepayment volatility and geopolitical uncertainties remain, the structural advantages of these assets-coupled with the Federal Reserve's policy trajectory-make them compelling additions to a diversified portfolio. As 2026 approaches, the strategic entry point for investors lies in positioning capital now to capitalize on the next phase of housing and bond market evolution.