Cooling Data Gives the Fed a Breather, but Housing Faces an Uphill Climb

 

In short: The latest jobs and inflation data took some pressure off mortgage rates and gave the Fed room to pause. But with Zillow forecasting mortgage rates only falling to 6.5% by year end, elevated borrowing costs are likely to slow housing activity in the second half.

Softer jobs and cooling inflation give the Fed room to breathe

Softer July payrolls and Consumer Price Index (CPI) both weakened the case for a Fed hike in the next meeting, pushing the market odds of a hold from slightly worse than a coin toss (45%) to about 60% in September. Payrolls fell 23,000 in July, with a downward revision of 103,000 jobs for the previous two months, leaving recent hiring weaker than previously believed. CPI inflation came in near expectations, and moderated from 3.5% year-over-year last month to 3.4% in July, which is benign enough to reduce some urgency for higher rates. The next move for the Fed is still a hike, but the report allows them space to take a breath. While geopolitical developments still remain a live risk, the macro data did offset some of the upward pressure on mortgage rates. 

What’s the impact on housing? 

Despite some of the softer macro data, mortgage rates are still higher than a year ago. After buyers enjoyed improving affordability for the first half of the year, the rest of the year will be an uphill climb. Zillow expects rates to fall only marginally to 6.5% by the end of 2026, which is higher than the 6.2% at the end of 2025. Affordability headwinds portend a weaker half of the year for sales growth, with flat to declining transaction volumes for the remainder of the year in some regions.