Inflation: The Key Driver
Inflation remains a dominant force, influencing both the bond market and the Federal Reserve’s decisions. In 2025, the Fed’s preferred inflation measure—the core Personal Consumption Expenditures (PCE) price index—stood at 2.8%. However, this figure is likely overstated, primarily due to delayed shelter data. Real-time rental data from sources like Apartment List and Zillow indicate rents are declining, suggesting inflation will trend downward in 2026. Tariff-related inflation is also expected to ease mid-year, providing further relief.
While shelter costs exert a heavy influence on both the Consumer Price Index (CPI) and the core inflation measure, both are trending lower. The consensus is that the true inflation rate is closer to 1.9%, but official statistics will likely lag. The forecast suggests core PCE inflation will fall to 2.5% over the next 12 months—a level that could give the Fed confidence to ease monetary policy.
The Labor Market: Signs of Weakness
Job openings have trended lower, and private payrolls are starting to show net job losses—a phenomenon not seen in some time. The rise of the gig economy means many unemployed individuals may forgo unemployment benefits in favor of gig work, understating initial claims data. BLS job reports, often revised downward, further suggest that the labor market is softer than headline numbers indicate. The unemployment rate, accurately forecast at 4.5% for 2025, is expected to rise to 4.8% or higher in 2026 if the Fed doesn’t act to support the job market.
Federal Reserve Outlook: More Cuts Ahead?
With a new, dovish Fed chair expected to be appointed in May and a voting roster leaning toward rate cuts, the outlook is for three quarter-point cuts in 2026, bringing the Fed funds rate down to around 2.875%. This is more aggressive than the consensus, which expects just one cut. The rationale: labor market weakness and overstated inflation figures should prompt the Fed to act.
Mortgage Rates: Opportunity on the Horizon
The interplay between Treasury yields and mortgage spreads will be crucial. If the 10-year Treasury hits the targeted low of 3.7%, and the spread narrows toward its historical average, 30-year fixed mortgage rates could fall to 5.7%. In an optimistic scenario, rates could dip to 5.5%—well below most industry forecasts, which hover above 6%.
Several factors could support lower rates: government debt management strategies, bank deregulation that allows greater Treasury purchases, the rise of stablecoins that require short-term debt backing, and ongoing quantitative easing. All signs point toward a more favorable borrowing environment for buyers and refinancers.
Housing Market: Pent-Up Demand Ready to Rebound
Demand for housing remains strong but suppressed, primarily due to high interest rates and limited supply. As rates decline, this pent-up demand could be unleashed, much like a compressed spring. Builders have been cautious, limiting new supply. Combined with a growing population and inventory still below pre-pandemic levels, this sets the stage for reasonable home price appreciation.
The forecast calls for 3.5% national home price appreciation in 2026—a moderate, sustainable increase. Active listings are stabilizing, and pending home sales are accelerating, signaling optimism for the year ahead. Local market variations will exist, but the national picture looks promising, especially if rates fall as predicted.
The Bottom Line: 2026 at a Glance
- Unemployment rate: Rising to 4.8% or higher
- Core PCE inflation: Trending toward 2.5% (true rate likely even lower)
- Fed funds rate: Three cuts, down to 2.875%
- 30-year mortgage rate: Low of 5.7% (potentially 5.5%)
- Home price appreciation: 3.5% nationally
While forecasts are never perfect, a data-driven approach—paying close attention to leading indicators, not just headlines—provides the best chance at anticipating what’s next. For homebuyers, homeowners, and real estate professionals, 2026 could offer meaningful opportunities as the economic winds shift. Here’s to a year of growth, stability, and success!
Call, text, or DM me anytime.
Mike Nelson, EO - Efficient Lending, Inc
720.419.3016 or mike@efficientlending.net or @mike_lending
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