Market Watch: Mortgage Rates Drop Below 6% for the First Time Since 2022 — What It Means for Housing and Investors

To understand why mortgage rates are finally falling, start with the Fed. After holding the federal funds rate at 4.33% for six consecutive months from February through August 2025, the central bank began cutting in September. Three successive reductions brought the benchmark rate to 3.64% by January 2026 — a cumulative 69 basis points of easing that has steadily worked its way through the Treasury market.

The 10-year Treasury yield, which most directly influences mortgage pricing, has responded accordingly. From 4.22% in early February, the 10Y has eased to 4.08% as of February 20. Meanwhile, the 2-year yield sits at 3.48%, producing a positive 10Y-2Y spread of 0.60% — a sign that the yield curve has fully normalized after its historic inversion.

The spread between the 30-year mortgage rate and the 10-year Treasury currently stands at roughly 193 basis points — elevated by historical standards but narrower than the 250+ basis point spread seen during the worst of the 2023-2024 rate shock. As credit markets continue to normalize and the Fed signals further easing, this spread has room to compress further, potentially pushing mortgage rates into the mid-to-low 5% range even before the next rate cut.

The housing market is sending mixed signals beneath the headline rate improvement. The S&P/Case-Shiller National Home Price Index, after peaking at 331.6 in June 2025, has softened to 328.1 as of November — a modest 1.1% pullback from the peak that suggests price appreciation has stalled but not reversed.

Existing home sales tell a more dynamic story. After languishing near 4.0 million units through much of mid-2025 — far below the pre-pandemic pace of 5.5 million — sales ticked up to 4.27 million in December before falling back to 3.91 million in January's seasonal dip. The December uptick, notably, coincided with rates falling below 6.15%, hinting that the rate sensitivity of the buyer pool remains acute.

Housing starts have shown similar volatility. Builders broke ground on 1.404 million units in December, up from a low of 1.272 million in October. The recovery aligns with builder sentiment surveys showing improved buyer traffic as rates declined, though starts remain well below the 1.5+ million pace needed to close the nation's estimated 4-million-unit housing deficit.

The fundamental tension remains unchanged: there are not enough homes for sale. The rate-lock effect — where homeowners with sub-4% pandemic-era mortgages refuse to sell and reset to 6% — continues to suppress existing inventory. Until rates fall substantially further, perhaps into the mid-5% range, this structural supply constraint will limit how much transaction volume can recover.

The path of mortgage rates ultimately depends on where inflation settles and how the Fed responds. On this front, the news is cautiously encouraging. The Consumer Price Index rose to 326.6 in January 2026, reflecting a year-over-year increase of approximately 2.2% — meaningfully closer to the Fed's 2% target than the 3.5%+ readings that dominated 2024.

This moderation gives the Fed room to continue cutting. Markets currently price in at least one additional 25-basis-point cut by mid-2026, which would bring the federal funds rate to roughly 3.4% and likely push mortgage rates into the high 5% range on a sustained basis.

However, the tariff environment introduces meaningful uncertainty. As of late February, the Trump administration has signaled new trade measures that could affect import prices across multiple sectors. BBC reported on February 23 that the UK government says "nothing is off the table" regarding retaliatory tariffs, while the President has threatened countries that "play games" with existing trade deals. If broad-based tariffs materialize, they could push consumer goods prices higher and force the Fed to pause or slow its easing cycle — a scenario that would keep mortgage rates elevated longer than the market currently expects.

For now, the base case remains constructive: inflation is trending in the right direction, the Fed is easing, and the yield curve is normalizing. But investors should watch the tariff headlines closely, as trade policy represents the single largest upside risk to rates in 2026.

The mortgage rate decline creates a differentiated investment landscape across housing-adjacent sectors. Home Depot, the bellwether for home improvement spending, trades at $376.99 with a price-to-earnings ratio of 25.68 — a premium that reflects expectations of improved housing turnover driving renovation spending. The company reports fourth-quarter earnings on February 24, and the stock is down 1.4% from its previous close, suggesting caution ahead of the release despite the favorable rate backdrop. HD sits about 12% below its 52-week high of $426.75, offering potential upside if management signals improving demand from rate-sensitive buyers.

Homebuilders stand to benefit most directly. Lower rates expand the pool of qualified buyers, boost affordability metrics, and typically drive order volume higher within one to two quarters of a sustained rate decline. However, builders face their own headwinds: lumber and material costs remain elevated, labor shortages persist, and the regulatory environment for new development has not meaningfully improved.

Mortgage lenders and servicers present a more nuanced opportunity. Lower rates boost origination volume — both for purchases and refinancing — but compress net interest margins as existing portfolio yields decline. The net effect depends on the pace and magnitude of the rate decline: a gradual move lower favors lenders, while a sharp drop can temporarily squeeze margins before volume compensates.

Real estate investment trusts focused on residential properties face a mixed setup. Lower mortgage rates make homeownership more competitive with renting, potentially slowing rent growth. But the persistent housing shortage and high absolute price levels mean many would-be buyers remain renters regardless, supporting occupancy rates and pricing power for apartment REITs.