Larry Summers delivered a stark fiscal warning Monday, telling an audience that the nation’s growing budget shortfall could soon force a dramatic spike in mortgage rates if federal revenues do not catch up with spending. Summers described the current fiscal path as "unsustainable," flagging a risk that fiscal dynamics, not just monetary policy, will determine mortgage costs and housing affordability in the year ahead.

The comments arrive as forecasts for mortgage rates diverge. Fannie Mae projects that the average 30-year fixed mortgage rate will fall to 6.4 percent by the end of 2025 and to 5.9 percent by the end of 2026 — a modest relief from recent peaks that would nonetheless leave borrowing costs elevated relative to the decade before the pandemic. Those projections face pushback from mortgage market analysts. Mike Fratantoni, chief economist at the Mortgage Bankers Association, cautioned that widening budget deficits and the potential for higher inflation in coming months could prevent rates from declining further.

Economists say the connection between fiscal deficits and mortgage rates runs through the Treasury market and inflation expectations. Large and persistent deficits require governments to sell more long-term debt, which can raise yields if demand does not keep pace. Higher Treasury yields lift mortgage rates directly because mortgages are priced off long-term government securities plus a credit spread. At the same time, a fiscal outlook that stokes inflation expectations would put upward pressure on nominal rates even if the Federal Reserve holds short-term policy steady.

For the housing market, the stakes are tangible. Elevated mortgage rates erode monthly affordability, shrinking the pool of qualified buyers and suppressing demand for existing homes. They also reduce the incentive for current homeowners to refinance, locking in higher monthly payments and limiting household balance sheet relief. If Summers’ warning materializes as a meaningful jump in yields, prospective homebuyers could see affordability deteriorate rapidly, prolonging any slowdown in sales and extending the period of price moderation in overheated markets.

Policy choices, not primarily monetary mechanics, are central to Summers’ diagnosis. Closing the gap between revenues and spending could take multiple forms: higher taxes, spending restraint, or a combination of measures. Each option carries political and economic trade-offs, from altering growth prospects to impacting specific constituencies. The timing of any adjustment matters for markets; uncertainty about the path of fiscal policy can itself elevate risk premia embedded in long-term rates.

Market participants will be watching economic data, Treasury issuance plans and any signs of fiscal consolidation as signals that could validate or contradict Summers’ forecast. For households and housing markets, the practical question is whether the modest rate relief that some forecasters expect will be durable or whether a fiscal-driven rise in yields will undercut that recovery. If deficits continue to swell without credible offsetting policy, Summers’ warning suggests mortgage rates — and the burden on homebuyers — could be higher for longer, reshaping the housing landscape and broader economic prospects.