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Last week we finished the Q3 update to our mortgage originations forecast and uploaded it into our Mortgage MarketSmart system. We predict we’ll see mortgage originations up over $2 trillion this year, the first time we’ve surpassed that mark since 2022. Then, in 2026, we expect more limited purchase segment growth and another moderate bump in refinances to drive originations to about $2.27 trillion.
Below we highlight some of the latest major economic factors and discuss how our outlook has changed as we approach the final months of 2025.
In the latest Q2/2025 estimate (released in September 2025), real GDP rose at a 3.8% annualized rate after falling in Q1 (-0.6%). The positive results were due to a decline in imports, which subtract from GDP, and an increase in consumer spending. These positive contributors were partially offset by declines in exports and investment. On a year-over-year basis, real GDP growth ticked up to 2.1% in Q2 from 2.0% in Q1. In our forecast, we continue to assume that by yearend, year-over-year GDP growth will still be positive but likely lower than 2.0%, as it decelerates due largely to the uncertainties and volatility of the administration’s policies and a decline in business and consumer confidence. We expect further economic slowing in 2026, as impacts from the new tariff regime work their way through the economy.
Job creation is slowing, but job losses and layoffs are still modest. For the last four months (May through August 2025), growth in nonfarm payroll employment has slowed sharply, with job gains per month averaging only 27,000, versus averages of 123,000 for the first four months of the year and 168,000 for 2024. The unemployment rate also ticked up to 4.3% in August, the highest since October 2021. However, initial claims for unemployment insurance in August were lower than expected. We still don’t expect a substantial decline in the labor market this year, despite the slowdown in job creation, but deterioration could accelerate in 2026.
As expected, the Fed dropped the Fed Funds target rate by 25 bps in its September meeting, and at least one more drop is expected by yearend. While rates on both the short and long end of the yield curve had drifted down in the two months prior to the Fed’s move, long-term rates have moved higher since then.
We continue to expect long-term rates to move slightly higher by yearend, pushed up by higher inflation expectations and a higher federal deficit outlook. But in 2026, when economic growth starts showing more significant signs of slowing or decline, those long-term interest rates will fall, pushing up mortgage originations, particularly refinances.
Since its low point of 2.6% in April, the Fed’s preferred inflation indicator—the change in the core PCE price index (personal consumption expenditures index excluding food and energy)—has moved slowly higher, reaching 2.9% in August. We continue to expect the current tariff policy will result in higher inflation by yearend and into 2026. Further stimulative moves by the Fed to lower short-term rates will increase the probability of this outcome.
As inventories for both new and existing homes have drifted higher this year, home price appreciation (HPA) has slowed in most of the country, and prices have even dropped in some bigger markets including a few in Florida, Texas, California, and Colorado. With moderating HPA and lower mortgage interest rates, housing affordability has improved since its peak (worst) level at the end of 2023, though conditions are still tough, especially for first-time homebuyers.
As the chart below shows, we calculate that it required 31.8% of the median household income to pay the mortgage for the median-priced home purchased in July 2025. This is significantly lower than the peaks of 2022 and 2023, as well as the peak in 2006.
Even though sales levels are still low relative to pre-pandemic levels, they have edged up a bit compared to last year, particularly in the higher priced segment of the market.
In Q2 2025, we made no changes to our forecast, but during Q2 and so far in Q3, we’ve seen market movements calling for adjustments to our outlook. Specifically, there have been a couple of interest rate dips that elicited short, but significant, spikes in refinance applications. One occurred as a financial market response to the “Liberation Day” tariff announcements. Another occurred as 30-year fixed-rate mortgage (FRM) rates dipped below 6.5% prior to the Fed’s September meeting. Because of these recent events, our 2025 refi outlook is up nearly 40% from our previous update, which brings it to 48% higher than 2024 refinance originations.
On the purchase side of the market, because of improvements in inventory levels and mortgage affordability, we’ve seen purchase originations running a little higher than expected and have nudged our 2025 purchase outlook up about 4%, bringing it to 12% higher than last year’s purchase total.
With those adjustments, our total purchase plus refinance originations forecast for 2025 is just over $2 trillion, a 20% increase from 2024. For 2026, we expect originations of $2.27 trillion, a 13% increase from our 2025 forecast, with a smaller gain in the purchase segment but a larger gain in the refinance segment.