Mortgage Spreads: The Unexpected Key to Lower Rates
For much of 2024, a puzzling situation existed in the mortgage market. Even as the 10-year Treasury yield dipped to 3.62%, mortgage rates stubbornly remained above 6%. The culprit? Elevated mortgage spreads – the difference between the 10-year yield and mortgage rates.
Now, those spreads are shrinking, and that’s a very positive sign for potential homebuyers. Currently, mortgage spreads are hovering around the normal range of 1.6% to 1.8%, recently recorded at 1.94%. This improvement is a major reason why rates are now comfortably below 6%, even with the 10-year yield currently at 4.03%.
What are Mortgage Spreads and Why Do They Matter?
Mortgage spreads represent the premium lenders charge for the risk and cost of originating a mortgage. Several factors influence these spreads, including economic uncertainty, lender capacity, and overall market demand. When spreads widen, it directly translates to higher mortgage rates for borrowers.
In 2023, spreads ballooned to as high as 3.11%. Had those levels persisted today, mortgage rates would still be exceeding 7%. The dramatic shift demonstrates the powerful impact spreads have on affordability.
The Path to Even Lower Rates
The great news doesn’t stop here. Further reductions in mortgage spreads could push rates even lower. According to recent analysis, if spreads were to fall to 1.6%, and the 10-year yield were to drop to 3.62%, mortgage rates could easily fall below 5.75%.
Several factors could contribute to this scenario. A weakening labor market, a more dovish Federal Reserve, or even a period of stability in the stock market – prompting investors to move funds into bonds – could all help to compress spreads.
Looking Ahead: The 2026 Housing Forecast
The current outlook is significantly more optimistic than previously anticipated. The initial 2026 forecast predicted a lowest mortgage rate of 5.75% with a 10-year yield of 3.80%. However, with spreads already improving, the potential for rates to fall below this level is increasing.
The upcoming leadership change at the Federal Reserve, with Kevin Warsh as presumptive chair, could too play a role. Analysts suggest Warsh may adopt a more dovish stance than his predecessor, Jerome Powell, particularly if Donald Trump remains president, potentially leading to further rate cuts.
Did you know? Improvements in mortgage spreads are often a leading indicator of broader economic trends, signaling shifts in investor sentiment and market confidence.
A Healthier Housing Market
The combination of lower rates, rising inventory, and cooling price growth is creating a much healthier housing market than the frenzied conditions of recent years. Reduced rate volatility adds another layer of stability, allowing both buyers and sellers to make more informed decisions.
Frequently Asked Questions
Q: What is a “spread” in the context of mortgages?
A: A spread is the difference between the 10-year Treasury yield and the interest rate on a mortgage.
Q: Why did mortgage rates stay high even when the 10-year yield fell in 2024?
A: Mortgage spreads were unusually high, offsetting the decline in the 10-year yield.
Q: What factors can cause mortgage spreads to widen?
A: Economic uncertainty, increased lender risk, and low market demand can all contribute to wider spreads.
Q: How can I stay informed about changes in mortgage rates and spreads?
A: Regularly consult reputable financial news sources, such as HousingWire, and consider speaking with a mortgage professional.
Pro Tip: Monitor both the 10-year Treasury yield *and* mortgage spreads to get a complete picture of the rate environment.
Want to learn more about the factors influencing the housing market? Explore our latest 2026 housing forecast and listen to the latest insights on today’s podcast.
What are your thoughts on the current mortgage rate environment? Share your comments below!
