Mortgage Rates Predicted To Rise Before Settling Back to 6.5% Next Year

Rising rates are weighing on the housing market, and the uncomfortable levels above 6% might be here for the medium term, capital markets firm Optimal Blue estimated in its latest report.

The 30-year fixed-rate mortgage has been on a steady upward march for six weeks—hitting 6.69% last week, up from 6.43% July 2. That's the highest it's been since July 2025, according to Freddie Mac.

Optimal Blue expects it to reach 6.76% in three months, then moderate slowly to 6.58% in 12 months.

Slowing inflation is a hopeful sign for mortgage rates. Once mortgage rates do go down, some cities may see a boom in home sales. But until then, the market is in a holding pattern of slower sales. And home sales are continuing to slow this year.

Optimal Blue expects rate sensitivity to continue weighing on borrower demand. The company says purchase volume declined 12% in July, as mortgage rates rose 26 basis points. And purchase pull-through, or the share of mortgage applications that made it to closing, fell 2.4 points to 78.9%.

“July was a clear reminder of how sensitive this market remains to rate movement,” said Mike Vough, senior vice president of corporate strategy at Optimal Blue. “A 26-basis-point rate increase was enough to pull both purchase and refinance volume meaningfully below June’s pace.

"The market is still outperforming last year, but momentum remains fragile and highly dependent on where rates move next,” Vough said.

The primary-secondary spread—a metric that tracks a lender's costs and margins in originating a mortgage—could also widen in the coming year.

The primary-secondary spread, or the difference between a mortgage rate offered to borrowers and the rate on a mortgage-backed security, now sits at 1.01%. It could narrow to 0.94% in the coming month but widen again, to 1.06% in 12 months, Optimal Blue said.

Demand still offers hope

Optimal Blue's July data on mortgage activity shows origination levels are slowing a bit from where they were in previous months. Still, the activity is pacing above what it was in 2025.

Refinance activity was 19% of total production. Rate-and-term refinance volume fell 17% month over month, undoubtedly as the rising rates took their toll. But the activity is 3% above what it was in July 2025 and cash-out refinance volume, 5% below what it was last month, is unchanged from a year ago.

New construction, which Optimal Blue determines by tracking planned unit developments, increased to 29% of total volume. Single-family detached homes remain the top property type, accounting for 63% of production.

And first-time homebuyers accounted for 44% of conforming purchase locks in July, down 1% from the month before. FHA first-time homebuyers bumped up month over month, from 69% to 70%.

And yet, purchase lock volume, which fell 12% month over month, is still 6% higher year over year.

That jibes with expectations the National Association of Realtors® released on Tuesday. While inflation continues to put pressure on the housing market, the pace of existing-home sales remains steady. Home sales are still 2.4% above where they were during the first seven months of last year, showing market resilience.