HousingWire’s lead analyst, Logan Mohtashami, highlights several macroeconomic variables that contribute to the range for mortgage rates in the coming year: economic growth, inflation, unemployment and the possibility of outright recession.
One big miss for forecasters in 2024 was that many assumed a recession was imminent. The headlines and the conventional wisdom saw a recession around the corner starting in late 2021 and by late 2023, many were certain recession was upon us. But the U.S. economy defied expectations and kept growing. As a result, mortgage rates stayed surprisingly elevated as well.
Contrary to the impact of recession expectations on interest rates is the power of inflation. In 2024, the prospect of inflation forced the Federal Reserve to keep short-term interest rates higher for longer. Finally in September, the Fed started its easing cycle. About that same time, the markets began anticipating a Trump victory and broadly speaking, the market views Trump’s economic plans as inflationary. As a result, yields on the 10-year treasury began rising even as the Fed started cutting.
Logan likes to point out that the Fed is still not “accommodative,” meaning that the Fed is more focused on restraining inflation than cutting rates to encourage economic growth and accelerate hiring. The Fed’s “pivot” from restrictive to accommodative hasn’t yet happened.
HousingWire’s Flavian Nunes points out how sensitive, even if indirectly, mortgage rates have been to Federal Reserve policy.
The 10-year and the spread
Mortgage rates are loosely tied to the yield of the 10-year Treasury. For 2025, we expect the yield range to be between 3.4% and 4.50% for the 10-year. Logan points out that absent any economic data indicating recession is upon us, the 10-year yield probably won’t go lower than 3.40%. If the economy continues to outperform expectations, the yield could push above 4.5%.
Mortgage rates trade at a premium to the yield on 10-year Treasury. The premium is known as “the spread.” As interest rates fell to record lows during the pandemic, the spread also fell to record lows. As rates spiked dramatically in 2022, that volatility forced investors to require a greater interest rate on mortgage securities and the spread increased. In the past three years, the underlying interest rate increased and the spread increased as well. Mortgage rates paid by the homebuyer got hit with a double whammy.
As interest rates have stabilized, the spread in 2024 has eased lower, from 291 basis points a year ago, to 238 basis points today. We expect stability on the underlying bond markets to allow mortgage spreads to continue to ease a bit lower in 2025. If during the year, the 10-year yield falls to the low end of the expected range, say 3.5%, and the spread eases down to 225 basis points, those moments would indicate mortgages available for 5.75%.
A slowly decreasing spread gives us a little optimism that mortgage rates will touch the low end of the range in our forecast for the year.
Unfortunately for homebuyers in the U.S. housing market, it seems unlikely that the growing U.S. economy, the bond market and the spreads will conspire to create a scenario where mortgage rates fall far enough to alleviate the affordability challenges faced by so many in the last three years.
Read the whole HousingWire Housing Market 2025 Forecast.
