After crossing 7% in mid-January, the 30-year mortgage rate appears to be back on a favorable track, settling at 6.63% as of March 6. This marks the sixth consecutive weekly decline in mortgage rates, bringing the average U.S. 30-year mortgage rate to its lowest level since early December 2024.

This fall offers a silver lining amid a chaotic period for the markets fueled by the tariff policies of the Trump administration and the growing likelihood of a recession in the United States. Investors turning risk-averse and shifting to government bonds, coupled with markets forecasting more rate cuts by the Fed in 2025, seem to be working in favor of mortgage rates.

Government Bonds & Mortgage Rates

The fluctuations in mortgage rates are more closely linked to the demand for government bonds. When demand for government bonds rises, mortgage rates typically decline. Volatility from the chaotic tariff policies of President Trump and concerns over an economic slowdown leading to market sell-offs have increased investor appetite for government bonds.

Investors are becoming cautious as recessionary fears rise, making government bonds appealing. A potential downturn is enough to push risk-averse investors toward government bonds, resulting in declining mortgage rates.

According to Yahoo Finance, the 10-year Treasury yield dropped to 4.1% in early March, the lowest since last December and from its January peak of 4.8%. Per strategists at Morgan Stanley, mortgage rates are expected to drop alongside Treasury yields over the next two years.

Relief Amid a Recession?

Recessionary fears are gaining momentum as factors threatening U.S. economic stability, such as declining consumer confidence, investment uncertainty and sluggish growth, continue to persist. A potential 2025 recession could lower home prices and mortgage rates.

According to Newsweek, during a recession, the Fed often lowers interest rates to boost economic activity. This can result in reduced mortgage rates, helping by improving housing affordability. Per economists at JP Morgan, the likelihood of a U.S. recession this year is forecast at 40%, a rise from the 30% recorded in early 2025.

Per Yahoo Finance, economic downturns often lead to lower mortgage rates. The S&P 500 has fallen 8.8% since mid-February (as of March 12). Even though the probability of a recession remains unlikely, a recession does not need to occur for portfolios to take a hit, as rising probability alone can trigger investor panic, leading to widespread sell-offs, making the market fall further.

Housing Market & the Fed

A decline in the Federal funds rate typically has an indirect impact on mortgage rates, resulting in a drop in mortgage rates. Investors are anticipating the Fed to reduce interest rates this year more than previously expected. According to the CME FedWatch tool, as on Yahoo Finance, markets now have a 60% chance of seeing three or more cuts by the year-end, up from 7.4% last month.

According to Reuters, markets expect the Fed to adopt a rapid rate-cut strategy if a downturn occurs. This can result in homebuilders being more optimistic in the coming months, as lower interest rates open doors to greater access to capital.

Forecasting Mortgage Rates

According to Forbes, mortgage rates will ease gradually through 2025 but will remain elevated. While a sharp drop is not expected soon, the projected decline should still provide some relief to the housing market as rates stay below their January 2025 peak.

According to the National Association of Home Builders, as quoted on Forbes, the 30-year fixed mortgage rate is projected to fall below 6.5% by mid-2025 and below 6% by the end of 2026.

Fannie Mae revised its mortgage rate forecast upward for 2025 and 2026, as quoted on Forbes, forecasting the 30-year mortgage rate to end 2025 at 6.6% and end 2026 at 6.5%, with mortgage rate volatility expected to persist. Freddie Mac also forecasts the rates to be elevated throughout 2025, though slightly lower than that registered in 2024, boosting refinance activity.

According to Forbes, both the Mortgage Bankers Association and Wells Fargo gave a similar estimate for mortgage rates, forecasting the rate to end the current year at 6.5%.

ETFs to Consider

Below, we have highlighted a few funds for investors to consider as mortgage rates are anticipated to finish the year lower than they began. Projections of a drop in mortgage rates increase the purchasing power of potential homeowners and investor interest. However, mortgage rate volatility is expected to remain throughout the year.

Investors can consider iShares U.S. Home Construction ETF (ITB Quick QuoteITB - Free Report) , SPDR S&P Homebuilders ETF (XHB Quick QuoteXHB - Free Report) , Invesco Building & Construction ETF (PKB Quick QuotePKB - Free Report) and Hoya Capital Housing ETF (HOMZ Quick QuoteHOMZ - Free Report) .

With a one-month average trading volume of 3.08 million shares, ITB is the most liquid option, offering investors easier entry and exit, ideal for active trading strategies, as heightened volatility may prompt early exits. ITB has also gathered an asset base of $2.66 billion, having the largest asset base among the other options.

Performance-wise, HOMZ outpaced other funds significantly, gaining 11.51% over the past year, with PKB coming in second, adding 4.55% over the past year. All four funds have declined over the past month, with HOMZ performing the best, falling just 0.64%, while ITB saw the biggest decline of 7.79%.

Regarding charging annual fees, HOMZ is the cheapest option, charging 0.30%, and is more suitable for long-term investing. HOMZ offers the highest dividend yield of 2.08%.