By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | November 3, 2025

Article originally posted in Orange County Register on October 30, 2025

This week the Federal Reserve dropped short-term interest rates by a quarter-point. Chairman Jerome Powell surprisingly said a one-quarter point December cut is not a done deal.

He blamed the softening labor market and rising inflation for caution ahead.

I went knocking on the door of several reputable California economists to ask what they’re seeing in their crystal balls.

They all used words including uncertainty, tariffs, worry, higher-end consumer, lower-end consumer and federal government shutdown.

Christopher Thornberg, the founding partner of Beacon Economics, started off with a bombshell prediction. Pointing to very scary asset bubbles like cryptocurrency and the $1.6 trillion of “hot money” going into AI and the stock market in general, he sees a market collapse.

“We are screwed, blued and tattooed,” Thornberg said. “The stock market is going to drop. The bond market is going to tank, and the U.S. dollar (currently at a 40-year high) is going to drop, too.”

What is going to spark the stock market collapse? And when is this going to happen? Thornberg doesn’t know exactly when, but something is going to set this off, possibly a geopolitical event or something within the stock market.

Before you dismiss his thinking out of hand, please be reminded that he correctly predicted the 2008 mortgage and real estate meltdown.

Thornberg also thinks mortgage rates could go to the high 8% range when this happens.

As for now, “things are good.” He sees mortgage rates in the 6-7% range and home pricing going up about 2.5% in the next year.

Unlike the other economists I interviewed, Raymond Sfeir, director of the A. Gary Anderson Center for Economic Research at Chapman University, doesn’t think a December rate cut is certain.

“It depends on what happens in the labor market and inflation,” he said. If inflation is worse, then he expects a rate-cut delay until January.

That said, Sfeir thinks the labor market is more of an issue than inflation. He pointed to the fact that federal government workers being offered paychecks through September (and not finding work) will start showing up as unemployed in October. It doesn’t help that companies like Amazon are shedding thousands of jobs.

Sfeir is alarmed about the federal debt recently crossing the $38 trillion mark, which is costing just under $1.2 trillion a year to finance the interest. Next year, we’ll be hitting $40 trillion, Sfeir said.

Sfeir sees interest rates ending the year at 5.9%. For 2026, he sees rates at 5.4 to 5.5%.

Ed Coulson, director of the Center for Real Estate at the Paul Merage School of Business at UC Irvine, sees a healthy economy with not a lot of signs of recession.

“Rents are stable to declining in most areas,” Coulson said. Orange County is the outlier, with rents creeping upward.

Coulson sees mortgage rates one-half point lower by the end of the year.

Sam Williamson, senior economist at First American Financial Corp., sees mortgage rates drifting below 6.2% next year with home prices with mid-single-digit increases.

As far as home sales volume goes, he sees the lock-in effect (low mortgage rates captured during the pandemic) creating a situation where nobody is in a rush to sell.

People are largely moving for one of the five Ds. “Death, divorce, diapers, diplomas (moving out from mom and dad) and downsizing,” he said.

Kara Ng, a senior economist at Zillow, sees home prices (nationally) rising just 1.5% next year with sales volume slightly up. Mortgage rates will be in the 6-7% range, she predicted.

“A lot can change as the Fed is operating blind (with data not available due to the government shutdown) that can influence the direction of the economy,” Ng said. “Affordability and uncertainty are the homebuyer headwinds.”

Richard K. Green, director of the USC Lusk Center for Real Estate, sees mortgage rates in the mid- to high-5s next year. Green is frustrated by current government policies.

“Government workers are not being paid. Mortgages and rents are not being paid,” said Green. “One guy makes policy changes on a weekly basis. Tariffs on Canada are off, on. What about China?”

Selma Hepp, chief economist at Cotality (formerly CoreLogic), believes the labor market is slowing so much that the Fed will drop short-term interest rates 50 basis points in the first half of 2026.

She sees interest rates at 6.1% for the rest of the year and 6% next year. She sees home prices rising 2% for 2026.

“We have the lowest affordability since the 1980’s,” said Hepp. “Home prices would have to fall 30-40% (to be affordable).”

I agree with Hepps’ assessment of a 50-basis point drop in the first half of 2026, partly due to the jobs slowdown and partly due to President Donald Trump putting one of his people in to replace the current chair.

My hunch? Rates will hover in the 5% range in 2026 with a pickup in home sales due to increased affordability. I also think home prices will rise by 5% next year.

Freddie Mac rate news: The 30-year fixed rate averaged 6.17%, 2 basis points lower than last week. The 15-year fixed rate averaged 5.41%, 3 basis points lower than last week.

The Mortgage Bankers Association reported a 7.1% mortgage application increase compared with one week ago.

Bottom line: Assuming a borrower gets an average 30-year fixed rate on a conforming $806,500 loan, last year’s payment was $291 more than this week’s payment of $4,924.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.375%, a 15-year conventional at 5.125%, a 30-year conventional at 5.875%, a 15-year high-balance conventional at 5.75% ($806,501 to $1,209,750 in LA and OC and $806,501 to $1,077,550 in San Diego), a 30-year high-balance conventional at 6.125% and a jumbo 30-year fixed at 6.125%.

Eye-catcher loan program of the week: A 30-year mortgage, fixed for the first five years at 5.5%, with 30% down payment and 1 point cost.

Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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