Editor’s note: this piece originally appeared in the November 2025 edition of MortgagePoint magazine.
After two years of muted activity, the mortgage market is showing signs of a slow but steady thaw. Michael Fratantoni, Chief Economist, SVP, Research and Industry Technology for the Mortgage Bankers Association, told MortgagePoint he expects moderate gains in origination volume in 2026, driven by rising inventory, life-event sellers, and a new wave of millennial first-time buyers. In this Q&A, he breaks down his baseline forecast, the rate scenarios that could swing volumes higher or lower, and why a cooling labor market may shift delinquency and foreclosure trends in the year ahead.
For 2026, what is your base case for originations volume (purchase vs. refinance), and what are the key variables that could tilt the outcome?
We’re looking for 8% growth in single-family origination volume, and that’s the case whether you look at that on a dollar basis or a unit basis. Some of our members are a little more focused on the dollar number, which we think is going to get to about $2.2 trillion. Some are paid based on how many loans they’re doing, so that unit forecast is also really important. We’re looking for about 5.8 million loans to be done. If you look at that on a dollar basis, it looks close to average over the past decade or so, but if you look at it on a unit basis, it highlights that it’s still a relatively slow market. We are expecting home sales to increase about 5% in 2026, both for new and existing, compared to where we were in 2025. So, it is still a relatively subdued housing market, but we’ve been getting better each year.
If you look at 2023, it was dead calm, hardly any activity at all, and each year has gotten a little bit better. The lock-in effect is still having an impact. You have a lot of owners out there with very low rates on their mortgages, and that is a friction that’s keeping them less likely to list their homes, so we’re not seeing as many move-up buyers as you would typically see. But we keep highlighting that there are still a lot of millennials out there. There are almost 50 million people between 30 and 40 in this country, and most of them are still renting, but they are getting to the peak first-time homebuyer age, so we expect, over the next couple of years, that’s going to keep putting some additional first-time homebuyers into the mix.
You asked about the main drivers that could lead us higher or lower than that. At our annual conference, we always include a slide that says, “What if mortgage rates are a percentage point higher or lower than in our baseline forecast?” In our baseline forecast, if mortgage rates are, call it six and a quarter right now, over the next couple of years, that’s about where we think they’re going to be, on average.
Obviously, you have moments where, as we’ve had in the past couple of weeks, investors are more focused on weaker economic growth, a weaker job market, hoping for more aggressive cuts from the Fed, and we’ll be at the lower end of a range—maybe we get close to six. There’ll be other times where folks are more concerned about inflation. Maybe the Fed’s not going to cut as aggressively as hoped. The biggest concern on the high side is the deficit, the debt, and the massive amounts of Treasury issuance over the next couple of years to finance that, and that’ll push us to the high end of a range. But our baseline is that mortgage rates are about where they’re going to be in terms of long-term fixed rates. We have highlighted that in our application data. About 10% of borrowers now are taking out an ARM, and we expect that’s likely to go higher because we do expect the Fed to cut a few more times.
So, with short rates coming down, even with long rates staying up, the benefit that a borrower gets going into an ARM is going to increase. We think that’ll be one way borrowers find some additional affordability over the second half of this year. We’ve seen weeks where ARM rates are a full percentage point below a fixed rate, so that’s our baseline. If we were to get much weaker growth or the job market doing more poorly than is in our baseline, you could get a lower rate path. The origination forecast is much more sensitive to rates dropping a point than rates increasing a point. So, if we get to the low fives, we see a big bump in origination activity in 2026. So rather than that 2.2 in our baseline, we get up to 2.8 in our estimate. If rates were to be much lower, on the other hand, if rates were to be a full percentage point higher, how do you get there? Inflation goes the wrong way. The Fed stops cutting and Treasury issues like crazy, then we’re below 2 trillion for 2026. I think that’s the reasonable range of outcomes, and we’re reasonably confident that we’re going to stay close to our baseline, because neither of those extremes is likely.
Do you anticipate another rate drop from the Fed in December, or do you think they’re going to hold steady?
We have penciled in one more in December and then one in the first quarter of 2026. Some market measures would say maybe two in 2026, but I think what you heard from Chairman Powell at the press conference this week is some real ambivalence among some in the committee. You got one dissent, and just listening to the speeches, I think there’s more bubbling beneath the surface. It’s going to be harder for them to cut much more, but the weakness in the job market is real. It’s tough to see because we don’t have the data right now with the shutdown, but everything is indicating that these next couple of quarters, we’re going to see the unemployment rate go up.
Do you see any factors likely to provide some relief on the lock-in effect in 2026?
We’ve already seen the lock-in effect begin to fade in 2025, and what I’ve been pointing to is the increase in existing home inventory. It’s up about 30% compared to last year. It’s still relatively low, but it’s moving up. A lot of that is life events: people continue to get married, have kids, get new jobs, all these things. They feel bad about leaving the low mortgage rate behind, but at some point, they do. I think when you get mortgage industry folks together, it can be a bit disconnected to my ears. The industry folks will be like, well, I’ll just keep that home and rent it out. That’s a higher-income professional way of looking at the world. I think most people sell the home when they don’t want to take that risk.
Given the sustained elevated mortgage-rate environment, what is the risk to credit quality or delinquency trends in 2026? Are there segments you’re watching closely?
The last data point we had was August, which was 4.3% for unemployment. We see that getting up to 4.7% by early next year—not awful, but more than what we’ve seen. The one thing to highlight there is, back in 2023, we were at 3.4%, so it’s more the change than the level that’s worth paying attention to. We’re moving up quickly. People are getting jobs very, very quickly. Now we’re at a place where hiring is very, very low. You’re beginning to see some more layoffs, and so the leverage in the job market has moved towards the employer, and you’re seeing wage growth slow. In terms of mortgage impact, one of the tightest correlations we see is between the unemployment rate and the delinquency rate.
What’s really changed is with respect to the housing market. Last year or two years ago, if someone lost their job and they decided they needed to move, they could list their home and it would be sold before the ink was dry. That is not the case anymore. Things are lingering on the market, particularly in Sunbelt markets. I think we’re going to see what would’ve been short-term delinquencies leading to a home sale previously; they’re going to progress into deeper delinquencies. Foreclosure rates have been extraordinarily low for the past couple of years. They’re probably going to go a little bit higher.
In the more normal world, whatever that was, the foreclosure process was one source of housing supply. It just hasn’t been in recent years, and I think that’ll be more of the picture in 2026. We will be in a somewhat weaker job market, delinquencies will go longer, foreclosures will increase, and we’ll see some of those distressed properties hit the market.
The post Housing Market Outlook 2026: Moderate Growth Amid Market Crosscurrents first appeared on The MortgagePoint.
