Morgan Stanley predicts major mortgage rate changes are coming soon

When mortgage rates surged in 2022, doubling from 3.5% to nearly 7%, it marked an end to the Covid-era housing boom. Stubborn mortgage rates have kept the market at a standstill, making purchasing a home more expensive for buyers and discouraging sellers from listing their homes.

Although mortgage rates were initially projected to drop notably in 2025, sticky inflation and economic uncertainty have kept them above 6.5%, despite three consecutive interest rate cuts at the end of 2024.

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It may take longer than expected, but mortgage rates are expected to modestly yet steadily decline through 2026.

Morgan Stanley analysts now predict that treasury yields will decline over the next two years, bringing mortgage rates down as well. Lower treasury yields are often caused by economic downturn and volatility in financial markets, but a reignited housing market would help stimulate GDP and economic growth.

Mortgage rates could drop as treasury yields fall

Although mortgage rates are influenced by the federal funds rate, they are more strongly tied to the 10-year treasury yield.

Lenders use the treasury yield as a benchmark for mortgage rates to keep mortgage-backed securities competitive with treasury bonds.

Secretary of the Treasury Scott Bessent has publicly announced the Trump Administration’s commitment to bringing down the treasury yield to provide housing relief, and Morgan Stanley analysts believe that will happen in the next two years.

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• Dave Ramsey warns Americans on a homebuying mistake to avoid
• Warren Buffett’s Berkshire Hathaway sounds the alarm on the 2025 housing market

In a new report, the investment bank wrote, “The good news is: Morgan Stanley strategists anticipate that mortgage rates could fall with Treasury yields over the next two years and home prices may decrease slightly amid increased housing supply.”

However, the treasury yield drops during economic uncertainty, as bond demand and prices rise when investors flock to ‘safe’ investments. If mortgage rates fall due to an economic downturn, it may be difficult for housing activity to revert to previous levels.

A housing revival may be the key to GDP growth

If mortgage rates do continue to fall through 2026 without a recession, increased homebuying could help stimulate the U.S. economy through GDP and consumer spending.

The National Association of Home Builders (NAHB) found that consistent mortgage rate declines in early 2025 raised homebuyer confidence enough to increase housing sales.

Related: Fannie Mae makes crucial update to 2025 mortgage rate forecast

Increased housing sales will not only create a hotter housing market but will likely increase economic activity. Morgan Stanley predicts consumer spending and residential investment will rise as lower mortgage rates reinvigorate the housing market.

“Housing flows into gross domestic product (GDP) not only through residential investment, but also through the impacts on consumption,” Morgan Stanley economist Heather Berger said. “Households spend more on durable goods following home purchases.”

U.S. Real GDP growth dropped 0.3% during Q1 2025, largely as a result of lower imports from reciprocal tariffs announced by the Trump Administration. Housing-related economic growth may become increasingly important as the full effects of U.S. trade wars are realized. 

Related: Veteran fund manager unveils eye-popping S&P 500 forecast

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