Morgan Stanley projects that mortgage rates will gradually decline through 2026 as long-term Treasury yields fall.
The housing market has been constrained since 2022, when mortgage rates rose from about 3.5% to nearly 7%. Although recent Fed rate cuts have helped, mortgage rates have generally remained above 6.5%, limiting buyer activity and slowing home sales and construction.
Mortgage rates move in response to several factors. While Federal Reserve policy affects short-term interest rates and overall financial conditions, mortgage pricing follows the 10-year Treasury yield more closely because lenders use that yield as a benchmark when setting fixed-rate mortgage terms.
Treasury officials, including Secretary Scott Bessent, have signaled an intent to ease longer-term yields to support the housing market. Lower 10-year yields would reduce borrowing costs for homebuyers, making mortgages more affordable and potentially reactivating housing demand. A revival in housing could, in turn, bolster broader economic growth by increasing construction activity, consumer spending on home-related goods and services, and labor demand in real estate and building trades.
For homeowners and prospective buyers, a gradual decline in yields and mortgage rates could create better refinancing opportunities and make monthly payments more manageable for new purchases. However, the timing and magnitude of rate declines depend on broader economic trends, including inflation, employment, and global capital flows. Market participants will be watching Treasury yield movements and related policy signals closely to gauge when borrowing costs might ease significantly.
In summary, Morgan Stanley’s outlook ties a gradual easing in mortgage rates to anticipated declines in 10-year Treasury yields through 2026. If yields fall as expected, the result could be more affordable mortgages, improved housing market activity, and a modest boost to economic growth—provided underlying economic conditions remain supportive.