As each year comes to a close, homeowners, buyers, and real estate professionals naturally start looking ahead. The questions are familiar — but the stakes always feel higher.
Where is the economy headed?
Will mortgage rates finally come down?
What does all of this mean for home prices and opportunity in real estate?
Let’s walk step by step through the key forces shaping the year ahead.
Rather than focusing on headlines or short-term noise, this outlook looks at the underlying drivers that influence interest rates, housing demand, and long-term opportunity.
1. The Economics: Inflation, Employment, and the Foundation of the Market
Economic conditions sit at the core of every housing and mortgage decision.
Inflation, employment, and consumer behavior all feed directly into interest rates — and ultimately affordability.
At first glance, inflation appears stubbornly above the Federal Reserve’s 2% target. However, a deeper look shows that inflation is meaningfully overstated, primarily due to how shelter costs are calculated.
Housing inflation is reported with long delays. Government agencies only survey a portion of the country each month, and rent data often reflects lease agreements signed many months earlier.
Meanwhile, real-time data sources show rents declining across much of the country — a trend that has not yet been fully captured in official inflation reports.
Shelter costs carry enormous weight in inflation metrics:
- More than one-third of headline CPI
- Nearly half of core CPI
This means even small delays or distortions in housing data can significantly skew inflation readings. When adjusted for these delays — along with temporary factors like tariffs and portfolio fee calculations — true inflation appears much closer to the Fed’s target than reported figures suggest.
In fact, today’s Truflation number is right at 2% as of this writing. More on that here…
At the same time, the labor market is clearly weakening. Job openings have steadily declined, private payroll data has shown multiple months of job losses, and unemployment continues to trend higher.
Initial jobless claims may appear low, but they no longer tell the full story. In today’s gig-based economy, many displaced workers turn to alternative income sources rather than filing unemployment claims — which understates the true level of labor market stress.
The economic takeaway:
Inflation is cooling faster than headlines suggest, while employment conditions are deteriorating — a combination that historically leads to lower interest rates and policy intervention.
2. The Federal Reserve: Policy Direction and the Shift Toward Rate Cuts
The Federal Reserve operates under a dual mandate: controlling inflation and maintaining maximum employment.
As inflation pressures ease and labor weakness becomes harder to ignore, the Fed’s priorities naturally begin to shift.
Looking ahead to 2026, several important factors suggest a more accommodative Fed:
- A voting composition that leans more dovish
- Rising unemployment
- Inflation readings that continue to drift lower as shelter data catches up
While most forecasts call for minimal rate cuts in 2026, I actually anticipate a more proactive response. My outlook calls for three quarter-point cuts, bringing the Fed Funds rate down to approximately 2.875%.
This expectation is based on two key assumptions:
- Inflation is less threatening than official numbers suggest
- The labor market is weaker than widely acknowledged
When those realities become undeniable, the Fed historically acts to prevent deeper economic damage.
Why this matters:
Although the Fed does not directly set mortgage rates, its policy decisions heavily influence bond markets, investor confidence, and the cost of borrowing across the economy — all of which feed into mortgage pricing.
3. Mortgage Rates: Understanding the Path to Lower Borrowing Costs
Mortgage rates are primarily driven by two components:
- The 10-year Treasury yield
- The spread between Treasury yields and mortgage-backed securities
For 2026, I project the 10-year Treasury reaching a low near 3.85%, supported by:
- Slowing economic growth
- Lower inflation expectations
- Fed rate cuts
- Increased demand for bonds
In recent years, mortgage rate spreads widened significantly due to volatility, uncertainty, and reduced demand for mortgage-backed securities. As market confidence improves, these spreads are expected to normalize toward historical ranges.
Historically, mortgage spreads typically fall between 1.6% and 2.0%. While current levels remain elevated, continued normalization could place spreads closer to the middle of that range.
Combining these factors:
- A 10-year Treasury near 3.85%
- A spread near 1.9%
This supports a projected 30-year fixed mortgage rate around 5.75%, with the potential to move closer to 5.625% if conditions improve further.
For homeowners and buyers:
Lower rates improve affordability, unlock refinancing opportunities, and act as a catalyst for increased housing activity.
4. Real Estate: Supply, Demand, and the Return of Buyer Activity
Housing demand has cooled sharply in response to higher mortgage rates, but this decline should not be confused with a lack of interest in homeownership.
Instead, the market is experiencing pent-up demand — buyers who are financially ready but waiting for affordability to improve.
At the same time, housing supply remains constrained:
- Builders have reduced new construction to match slower demand
- Inventory remains below pre-pandemic levels when adjusted for population growth
- Active listings have risen from historic lows but are now beginning to flatten
As mortgage rates ease, demand is expected to return faster than supply can respond. Builders cannot ramp up production overnight, and existing homeowners remain hesitant to sell unless affordability improves.
This imbalance supports:
- Increased transaction volume
- Stabilizing inventory
- Continued upward pressure on home prices
While appreciation will vary by market, the national picture suggests a return to more typical, sustainable growth rather than the extremes of recent years.
5. The Lending Coach Forecast: What 2026 May Bring
Based on economic trends, policy expectations, and housing fundamentals, my 2026 forecast includes:
- Unemployment: Rising toward 4.8%, potentially higher
- Core Inflation: Around 2.5%, with true inflation likely closer to 2%
- Fed Funds Rate: Approximately 2.875%
- Mortgage Rates: A low near 5.75%, with potential to reach 5.625%
- Home Price Appreciation: Approximately 3% nationally
These figures represent national averages. Local market conditions — such as job growth, migration, and housing supply — will determine individual outcomes.
Final Thoughts: Strategy Matters More Than Timing
The outlook for 2026 suggests a market transitioning toward greater balance — one where opportunity exists, but smart planning matters more than speculation.
- For buyers, lower rates may finally restore affordability.
- For homeowners, refinancing opportunities could reemerge.
- For long-term investors, steady appreciation continues to support real estate as a wealth-building tool.
Understanding how the economy, Federal Reserve policy, mortgage rates, and housing supply interact allows you to make decisions with confidence — not emotion.
The most successful moves in real estate are rarely about reacting quickly. They’re about preparing thoughtfully and acting when the conditions align.
If you’d like help translating this outlook into a personalized strategy, a focused conversation can help clarify next steps — based on your goals, timeline, and financial picture.
Do reach out directly to me to begin crafting your plan!
As always, you can set up an appointment with me here…
The blog postings on this site represent the positions, strategies or opinions of the author and do not necessarily represent the positions, strategies or opinions of Starlight Mortgage. Each loan is subject to underwriter final approval. All information, loan programs, interest rates, terms and conditions are subject to change without notice. Always consult an accountant or tax advisor for full eligibility requirements on tax deductions.
