Fannie Mae’s May housing forecast predicts that the 30-year average interest rate will be 6.3% from the end of 2026 through most of 2027, as inflation remains high due to the Iran war and the Federal Reserve lowers interest rates.
According to Fannie Mae’s May Mortgage Forecast released on May 12, 30-year fixed mortgage rates will average 6.3% through the end of 2026, with significant changes expected in the second quarter of 2027 at the earliest.
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This is a significant correction from where Government Sponsored Enterprises (GSEs) were just three months ago.
In its February outlook, Fannie Mae expected 30-year interest rates to average 6% by the end of 2026. In March, the GSE predicted that interest rates could reach a minimum of 5.6% by mid-2027. Those predictions did not survive until the spring, and the reason was the Iran war.
Interest rate shock due to Iran war
In the first quarter of 2026, 30-year fixed rates averaged 6.1%, which was partially due to a steady downward trend from January to February. Then, in late February, the US and Israel attacked Iran, and the interest rate shock dealt a severe blow.
The 30-year average rose from a multi-year low of 5.98% in late February to 6.46% by early April, an increase of 48 basis points in about five weeks and almost overnight erased months of interest rate increases, according to Freddie Mac’s Primary Mortgage Market Research.
The military conflict began on February 28, when the US and Israel launched attacks across Iran, but has not yet been resolved. President Trump said this week that he was postponing a new planned attack because “serious negotiations” were underway, according to the Associated Press.
According to the latest Freddie Mac Primary Mortgage Rate Survey, 30-year fixed mortgage rates averaged 6.36% as of May 14, down slightly from last week’s average of 6.37%. At this time a year ago, 30-year interest rates averaged 6.81%.
Strait of Hormuz issue
War is not just a rate event. This is an inflationary event, and this distinction is important to those who monitor the Federal Reserve.
Due to the continued closure of the Strait of Hormuz, energy prices continue to rise, and the main price of CPI also rises accordingly. “The headline inflation rate remained high in April as energy prices continued to rise due to the continued closure of the Strait of Hormuz,” said Chen Zhao, head of economic research at Redfin, following the release of the consumer price index last month.
Chen Zhao
Rising inflation has reduced the Fed’s ability to lower its base rate, and the Fed has kept rates unchanged for the first three meetings of 2026. Wall Street traders aren’t pricing in a rate cut this year, and there are signs pointing to future rate hikes. Traders raised the probability of a year-end rate hike to about 30-40% following April’s CPI report, according to CME Group data.
Mr. Zhao said that the recent jobs report lowered the risk of a recession, meaning there was little reason for the Fed to cut rates anytime soon. “At the same time, today’s inflation report provides no reason for the Fed to become dovish,” she wrote. “Indeed, officials may continue to move away from an ‘accommodative bias’ and towards a more balanced stance, with their next action likely to be either a rate hike or a rate cut.”
In the short term, Zhao said, “Mortgage interest rates will continue to fluctuate less due to the release of economic indicators, and will fluctuate more depending on oil prices and the progress of negotiations in the Middle East. This is the fundamental cause of changes in economic indicators.”
Decrease in single-family housing starts
Less notable in May’s forecast: Single-family housing starts are in worse shape than the key interest rate figures suggest.
Fannie Mae now forecasts that single-family housing starts will decline 2.4% in 2026 from the previous year, an improvement from April’s forecast of a 4.2% decline, but still negative. The problem with this revision is the outlook for 2027. The GSE previously expected single-family housing starts to rise 2.7% next year. The forecast for May has lowered this to a 0.4% increase rate.
Lower construction starts mean less new inventory coming onto the market in 2027 and 2028, which will put upward pressure on home prices in the absence of meaningful interest rate relief. The quarterly updated Fannie Mae Home Price Index projects full-year 2026 home price growth of 3.2 percent on a Q4/Q4 basis, rising to 1.9 percent by the end of 2027.
This is a housing market where affordability will not improve much as interest rates remain high, new supply declines, and prices continue to rise slowly.
What should real estate agents take away from this?
The real outcome for agencies is what the data has shown since March. In other words, you shouldn’t plan your business with lower interest rates in mind.
The consumers most affected by this forecast are first-time buyers who have fixed target monthly payments based on a less than 6% assumption. With a 30-year fixed rate of about 6.3%, monthly payments for a median-priced home are significantly higher than they were at the beginning of the year, and Fannie Mae data suggests the gap won’t close anytime soon.
The GSE’s implicit message to buyers is that if they can afford to pay today, waiting for a better interest rate environment means waiting until at least 2027, and there is no guarantee that the Iran war and the inflation it will cause will be resolved in that timeline.
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