“Mortgage applications were essentially flat last week. Ongoing affordability pressures continue to shape borrower behavior, driving increased interest in FHA and adjustable-rate mortgage (ARM) products,” Bob Broeksmit, president and CEO of the Mortgage Bankers Association (MBA), said in a statement.
“ARM applications rose to a seven-week high, reflecting buyers’ efforts to manage monthly payments amid the current interest rate and home price environment.”
Inflation and existing home sales
On Thursday, the National Association of Realtors (NAR) reported that existing home sales in January were negatively impacted by severe winter weather that blanketed much of the country.
The annualized sales rate of 3.91 million homes represented an 8.4% decline from December and a 4.4% decline from January 2025. While Winter Storm Fern was a contributing factor, there were other warning signs that closed sales would decline, according to Bright MLS chief economist Lisa Sturtevant.
“Closed sales generally represent contracts made in the 30 days prior. Pending sales were slow in December even as mortgage rates dropped,” Sturtevant explained. “Many buyers stayed on the sidelines, waiting not just for lower rates but also rate stability. Therefore, the January closed sales numbers are really reflecting conditions buyers encountered during December.”
But she also believes buyers will encounter more favorable conditions — including more listings, slower home-price appreciation and stable mortgage rates — as the spring homebuying season approaches.
“Market conditions will vary depending on what part of the country you are in,” Sturtevant added. “There will likely be more sales in the Southeast and Southwest where inventory has climbed, while tight supply will continue to be a constraint on home sales in some Midwestern and Northeastern markets.”
Consumer Price Index (CPI) data for January showed improvement in the annual inflation rate as prices rose 2.4%, down from 2.7% growth in December. Shelter-driven inflation was up 0.2% during the month and up 3% for the year.
Sam Williamson, senior economist for First American, said the inflation reading is likely to keep Federal Reserve policymakers “cautious as they watch whether tariff-related cost pressures feed through more broadly into prices.” But having inflation move closer to the central bank’s 2% annual target is positive news as it spurs the potential for further interest rate cuts in 2026.
“For housing, January’s (inflation) report is another incremental tailwind heading into the spring. As inflation cools and markets price a clearer path to easing, mortgage rates can drift modestly lower even before any policy move, providing a small affordability boost,” Williamson said.
“That would add to recent improvements from slower home price growth and rising incomes, helping bring some rate-sensitive demand back as the market enters the peak buying season.”
What will the Fed do in March?
After the Fed lowered rates for a third straight time in December, officials indicated that the path to more rate cuts in the near future would be increasingly measured.
The likelihood of a cut in March is shrinking, according to the CME Group’s FedWatch tool. Only 10% of interest rate traders think the federal funds rate will be lowered after the Fed’s next meeting concludes on March 18. That’s down from roughly 21% only a month earlier.
But the odds are higher further down the road, with 25% calling for a 25-bps cut in late April and 50% expecting one by mid-June. Lowering the fed funds rate to a range of 3.25% to 3.5% would mark its lowest point since September 2022.
Ongoing conflicts between the Trump administration and the Federal Reserve could also filter into the direction of mortgage rates.
The Supreme Court is expected to announce a ruling on the president’s attempt to fire Lisa Cook in the coming months. And some lawmakers have stated they will not support the nomination of Kevin Warsh as the next Fed chair unless the administration drops an investigation into current chair Jerome Powell.
Cook, who continues to have a vote on interest rates in 2026, offered her thoughts on monetary policy during a recent speech in Miami. She said that persistent inflation led her to support no cut at the Fed’s January meeting.
“At the height of the recent bout of high inflation, we promised that we would return to (the 2% annual) target, and it was this promise that kept inflation expectations anchored and allowed us to see the sharp disinflation from 2022 through 2024,” Cook said.
“If we were to lose credibility, the cost may not be immediately felt, but it would be resoundingly and painfully felt when we need it the most, in an inflation crisis such as the one we experienced three years ago.”