Economist sees potential battle between inflation and growth, putting the Fed in the spotlight
Home prices have slowed their ascent, and some reports from the past week showed house price declines. However, market turmoil caused by tariffs, budget legislation, and credit rating downgrades could mean more stormy waters are ahead for the mortgage market.
On May 16, Moody’s downgraded the United States’ credit rating from AAA to Aa1, ending the country's streak of perfect credit since 1917. In addition, Congress is currently working on a government funding bill that includes a substantial tax cut concerning bond investors.
Odeta Kushi (pictured top), deputy chief economist at First American, said that the combination of these factors could lead to short-term challenges in the mortgage sector.
“The downgrade, alongside proposed tax cuts, has amplified concerns about rising US debt and deficits,” Kushi told Mortgage Professional America. “Those worries have pushed up yields on the 10-year Treasury, the benchmark most closely tied to mortgage rates. In the near term, this could translate into higher borrowing costs for homebuyers.”
Kushi notes that some of this turmoil could put the spotlight on the Federal Reserve. It could force the central bank to make cuts to stimulate the economy, which could also cause more inflation issues.
“Over the medium term, it will depend on the broader tug of war between inflation and growth,” Kushi said. “If economic growth weakens, the Fed may lean toward rate cuts to avoid a recession, which could bring some downward pressure to mortgage rates.”
Are Fannie’s forecasts too optimistic?
Fannie Mae’s updated forecasts for the rest of the year shows it expects an increase in originations and a decrease in interest rates. It says rates will finish 2025 at 6.1% and 2026 at 5.8%.
However, with higher rates continuing, and market turmoil likely the normal in the near future, some brokers are questioning whether the forecasted relief will ever arrive.
Kushi acknowledged the challenges of mortgage rate forecasts.
“Mortgage rate forecasting is notoriously difficult,” she said. “Rates are shaped by economic fundamentals, investor sentiment, and global geopolitical risks. In the short term, tariffs and trade policy pose downside risk to growth and upside risk to inflation, a tricky balance for the Federal Reserve.”
However, if the market steadies itself and the Fed can resume its originally planned rate easing, the economist can see a path forward toward the Fannie Mae projections.
Stacey Melton of Reasy Financial cautions potential homebuyers against expecting a significant drop in home prices or interest rates. She highlights the current mortgage market's stability compared to 2008.https://t.co/P08RTpSWcY
— Mortgage Professional America Magazine (@MPAMagazineUS) May 22, 2025
“If inflation stabilizes and the Fed begins to shift toward a more accommodative stance to prevent a slowdown, we could see mortgage rates decline gradually over the second half of the year,” Kushi said. “Mortgage rates close to 6% are not out of the question, it just depends on how the economic data unfolds.”
Wide ranges in regional home prices
While First American’s national numbers showed a price increase in April, it was the slowest appreciation since 2012. The change in the company’s Home Price Index (HPI) was just 0.4% from March to April.
“While national home price growth remains positive, it’s barely holding on, hovering in the low single digits,” Kushi said. “But the national data masks a wide range of regional price variation. Some markets are still seeing appreciation, while others are cooling or even declining.”
Kushi said that with some markets cooling, or even depreciating, it is putting buyers in a stronger position to negotiate price or concessions, especially compared to a couple months ago.
“This divergence matters because affordability is shaped by home prices, mortgage rates, and incomes,” she said. “With mortgage rates still elevated and flattening, or even falling, prices in some markets, home buyers may find themselves in a stronger negotiating position than just a few months ago.”
Because of all the economic turmoil and rates remaining high, she believes that home prices should continue cooling in the short term.
“Home price growth will likely remain muted amid elevated rates and ongoing economic uncertainty, all of which continue to dampen demand amidst rising inventory,” Kushi said.
“Affordability remains the biggest constraint, driven by home prices, mortgage rates, and household incomes. Slower price growth is encouraging. It gives income-driven purchasing power a chance to catch up.”
Kushi reminds brokers and consumers that while national numbers are good to keep an eye on, each region of the country will likely look very different than another region.
“Real estate is hyper-local, and this market is no exception,” she said. “While markets in the South are seeing price slowdowns or outright declines, many areas in the Northeast and Midwest remain competitive, with tight inventory and stable or rising prices. National trends are useful, but they don’t replace an understanding of local dynamics.”
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