How Fed changes, an economic slowdown, and affordability challenges could affect borrowing costs
Thanks in part to a worse-than-expected jobs report last week, mortgage rates have seen a steady decline over the last week. Still, there are additional challenges on the horizon both before the next Federal Reserve meeting in September and over the rest of 2025.
Selma Hepp (pictured top), chief economist at Cotality, said that at a time when economic data will be crucial in determining the future of mortgage rates, news of the termination of Bureau of Labor Statistics chief Erika McEntarfer gives economists pause.
“With potentially economic conditions softening pretty rapidly, the concern is, are we going to have a good visibility into what's happening with the economy if we don't have good data?” Hepp told Mortgage Professional America. “So we're really worried about that now, as an economist group.”
But with the economy potentially hitting a speed bump, and with the likely impact of tariffs still unknown, Hepp believes the decline of interest rates could continue, which could spark a Fall housing burst.
“You could see a slowing of mortgage rates because of a potentially slowing economy,” she said. “The other thing is, what happens to the housing market for the remainder of the year? Now we're entering a slower time of the year. Remember what happened last September. Mortgage rates were down almost 100 basis points at one point. It was a bit of a boost.”
Home prices remaining flat
While Hepp doesn’t anticipate a major swing in rates, she does see home prices continuing to level out, which could also drive business. But she said affordability challenges could also keep home sales at the same level.
“Home prices are already weak, and even the seasonal increases were weaker than we typically would see,” Hepp said. “I'm expecting a pretty flat home price appreciation and then housing purchase activity. I don't think things are going to really change much. Maybe, as we get more clarity on the economy, and maybe what happens with the Fed next year. I just don't see much changing until spring of next year.”
Hepp agreed with many brokers in the industry that it is less about the actual mortgage rate and more about how the payment fits into a budget, as well as the long-term benefits of wealth building from buying a home. She said pandemic rates are still influencing rate perception.
“It's all really about perspective,” she said. “The perspective now is, we are almost 400 basis points higher than we were a few years ago. It makes the housing purchase very unaffordable. And I think it's really about affordability more than it is where the actual mortgage rates are.”
Since rates likely won’t return to pandemic levels barring another economic disaster, she believes the key to affordability is home prices and a need for a market correction. However, too large a drop in home prices can also damage the market.
“That's always what I'm struggling with, what is a normal market,” Hepp said. “There is no normal market, because each market was unique in its own way. What characterizes it, making it so much focus on mortgage rates, is that it's so unaffordable. For the housing market to become more affordable, we need either mortgage rates to drop, or home prices to drop, or both.
“Nobody really wants to see more house prices dropping. You introduce another level of risk with people underwater with negative equity, and then if you do have a recession, you're potentially looking at more mortgage delinquencies.”
Fed independence
One other factor Hepp mentions is the political independence of the Federal Reserve. While some experts are not as concerned with pressure put on the Fed, Hepp said it can affect monetary policy.
“With all these calls attacking the Fed, and even Jerome Powell himself, it just calls into question the Fed's independence,” she said. “And then, if you have a different governor installed as the Fed chair, how much is that governor under the thumb of the new administration? So all of that gets priced in.”
A combination of a weak jobs report and a key Federal Reserve resignation has made a September rate cut "almost certain."https://t.co/uCHQW3owaG
— Mortgage Professional America Magazine (@MPAMagazineUS) August 4, 2025
She believes that if the Fed becomes more politicized, it might cause foreign investors to question whether they want to continue investing in the US. If they view it as a riskier investment, it could cause rates to rise to account for the risk.
“When you think about who the investors were,” Hepp said. “For a long time, investors were foreign entities, including the Chinese government, for example. They had assurances that there were well-functioning institutional systems that are now getting questioned. People want to get compensated for that risk. All of this is not going well for the spread on the mortgage rate.”
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