Rising federal debt drives rates: What brokers need to watch next

Fannie Mae’s latest housing forecast suggests a steady market through 2025, with total home sales projected at 4.74 million units.

Existing-home sales are expected to hold close to last year’s levels, while mortgage rates are now anticipated to end the year at 6.5% before easing slightly to 6.1% in 2026.  

Mortgage applications for new home purchases rose 6.8% year-over-year in July and 7% from June, reaching their highest levels since April, according to the Mortgage Bankers Association(MBA).

The MBA estimates new single-family home sales at a seasonally adjusted annual rate of 685,000 units, up 2.7% from June. Conventional loans accounted for just over half of applications, while FHA loans made up more than a third, and the average loan size reduced to $372,745. Builders’ concessions and slightly lower mortgage rates supported affordability and fueled demand.

Three out of four metro areas saw home prices increase in Q2 2025, according to the National Association of REALTORS®.

While fewer markets posted gains compared to earlier this year, the national median single-family price rose 1.7% year-over-year to a record $429,400.

Regional trends varied, with the Northeast and Midwest seeing the fastest price growth as opposed to the South holding flat amid new construction. Affordability pressures remain, with typical families spending over a quarter of their income on housing costs.

The national debt stands at $37 trillion and grows by roughly $3.56 million every minute.

The national debt figures are staggering and difficult to grasp, but the burden becomes clearer when broken down:

·      $108,000 per U.S. citizen

·      $323,000 per taxpayer in the U.S.

Another perspective is the cost of the interest. In fiscal year 2024, interest payments on the debt accounted for 13% of all federal spending, making it the second largest budget category.

The debt is a problem, one that will only get worse over time. Elected officials face a difficult choice: Cut spending and/or raise taxes to balance the budget, or continue borrowing to fund programs and maintain popularity with their constituents. More often, the latter path is chosen, pushing the problem further down the road.

The U.S. government primarily borrows money by issuing securities through the U.S. Treasury. These securities are essentially loans from investors to the government. These include: 

·      Treasury bills (T-bills): Short-term debt, maturing in a few days to 1 year.

·      Treasury bonds: Long-term debt, typically 20 or 30 years.

·      Treasury Inflation-Protected Securities (TIPS): Bonds where the principal and interest adjust with inflation. 

·      Treasury notes (T-notes): Medium-term debt spanning 2 to 10 years, paying interest every 6 months. These are the most commonly issued and traded securities and account for over 50% of the marketable debt.

Treasuries are often referred to as “risk-free” investments because they are backed by the “full faith and credit” of the U.S. government. In reality, they still carry risks tied to inflation, interest rates, and – however unlikely – default. Their long history of reliability and liquidity have made them the global benchmark for investment returns.

The 10-year Treasury note is especially important because it aligns with the average life of most mortgages. This is because most mortgages are paid off, refinanced, or sold within 7 – 10 years, aligning with the maturity of the notes. Mortgage lenders use the 10-year yield as a baseline for what investors could earn for similar “risk-free” investments, then add a spread to cover for borrower risk, servicing costs, and other market factors.

When Treasury yields rise, mortgage rates typically follow. For example:

·      If inflation expectations increase, investors demand higher yields to protect their returns.

If an investor bought a 10-year Treasury note today at 4.30%, but inflation rises above that over the period, the investor would effectively lose money on their investment. When investors are worried about inflation, the interest rate they demand to invest moves higher to offset the risk of higher inflation. 

·      Higher Treasury yields, in turn, push up mortgage rates, making homeownership more expensive.

This linkage means that the escalating federal debt can directly affect the housing market and keep mortgage rates elevated.

As debt continues to mount, so does the cost of servicing it. The percentage of our budget that needs to be allocated to paying the debt rises and it can eventually reach a point where it is unmanageable. With default being the last resort, a potential solution is to print more money to meet obligations. This starts a cycle called the “debt death spiral,” which could threaten the entire financial system:

·      More money is printed and added to the money supply, which increases inflation.

·      Higher inflation means investors demand higher yields.

·      Higher yields cause rising Treasury rates and mortgage rates. 

On a more positive note, there are encouraging signs that the debt issue is entering into the national conversation. Scott Bessent, the U.S. Treasury Secretary, has recently stated that the priority for new revenues (i.e., tariffs) would be used to pay down the federal debt. Even a modest statement that acknowledges the problem can move markets: Treasury yields dropped in response, followed by mortgage rates.

The federal debt is no longer just an abstract number. It’s having a tangible effect on household budgets, especially through mortgage rates. While solutions will not be easy, recognizing the problem is the critical first step. 

·      September 2 – 5: Elevate Credit Union Leadership Summit, Dallas, TX

·      September 4: Texas Mortgage Roundup, Richardson, TX

·      September 15 – 16: AzAMP Annual Expo, Fort McDowell, AZ