Fratantoni says inflation and heavy borrowing will keep 30-year mortgage rates above 7% next year
While recent economic data has led many economists to believe the Federal Reserve will hold rates at the end of the month, economists at the Mortgage Bankers Association (MBA) don’t believe the central bank is done with rate hikes.
The MBA expects two more hikes, one in December and another in the first quarter of 2027. Markets are betting on even more, with CME FedWatch showing three hikes through June 2027.
That follows the Fed's September increase to a target range of 3.75% to 4%, its first hike since 2023. The MBA expects 30-year mortgage rates to stay above 7% through all of next year, which leaves little relief for borrowers or brokers.
Mike Fratantoni, chief economist and senior vice president of research and business development at the MBA, laid out the forecast Sunday at the association's annual convention in Chicago, alongside Joel Kan, vice president and deputy chief economist, and Marina Walsh, vice president and head of industry analysis.
"We think the Fed is going to be in a position where they have to hike a couple more times," Fratantoni said. "They've signaled pretty clearly now they're going to take October off right before the election, and so a hike in December, a hike sometime in the first quarter, that'll bring the Fed's target Fed funds rate above the level of inflation, which is really what you need to put sufficient pressure on it to move down in, to use the Fed's words, a timely fashion. But we think they'll hold at that level really through much of the forecast window."
Why rates stay high
Inflation is the main reason. The personal consumption expenditures price index and the consumer price index are both running at about 3.4%, and Fratantoni said it will likely take until around 2028, maybe later, to get back to the Fed's 2% target.
This year's driver is an oil price shock, with Brent crude near $100 a barrel. Markets expect a drop, Fratantoni said, but he called that a low-confidence prediction.
The 10-year Treasury touched about 5.36%, its highest level in 24 years, before closing near 5.25% on Friday. The MBA expects it to average 5.1% in the fourth quarter and hold near 5% through 2027, with the 30-year mortgage rate averaging about 7.25% this quarter and staying around 7% or higher next year.
Rates are climbing abroad too, with Europe and Japan at levels not seen in more than 30 years. Fratantoni pointed to heavy government borrowing and roughly $1 trillion in expected capital spending on artificial intelligence infrastructure through 2027.
"We're just in a world right now where we have more borrowers than savers," he said. "That naturally is going to be putting upward pressure on rates."
Volatility has also widened the spread between mortgage rates and Treasuries to about 220 basis points, up from roughly 200 for much of this year but below 300 in 2023.
The MBA's baseline forecast remains its most likely path, but it also runs scenarios with rates 100 basis points above and below it. A path a full point higher, taking mortgage rates into the 8s, would most likely be driven by inflation and an energy price spike, Fratantoni said.
Pressure on households
Fratantoni called the job market one of the surprises of 2026, with unemployment at 4.2%, close to the 4% he would call normal. Job growth has been slow and concentrated in healthcare, food and hospitality, and state and local government.
Wage growth has slowed to about 3% from 4.5% to 5% not long ago, and consumer credit is now growing faster than wages. The personal saving rate has been drifting down.
"Your typical household, their income is not keeping up with the cost of living," Fratantoni said. "If you're going to watch one macroeconomic variable, I'd recommend this one, because I think that personal saving rate captures the whole story pretty well."
Workers are feeling it too, with Federal Reserve Bank of Atlanta data showing a rising share worried about losing their jobs. In the Wall Street Journal's quarterly survey of economists, the MBA most recently put the odds of a recession in the next 12 months at 35%, up from the 15% to 20% it gives in reasonably good times.
"There are real risks that we get a significant slowdown," Fratantoni said. "Consumer spending is a little shaky. The financial markets are sort of priced to perfection along a lot of dimensions, and a lot of the spending that is happening is based upon stock market values being as high as they are."
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
