Well, it’s been more than a week since the Fed cut interest rates and mortgage interest rates have risen.
While this may come as a surprise to some, seasoned mortgage industry experts haven’t caught on.
It’s very common for the Fed to do one thing and mortgage interest rates to do another.
Without getting too complicated, the Fed adjusts short-term interest rates while mortgages are long-term interest rates, also known as 30-year fixed rates.
In other words, the reduction (and future reductions as well) have already been priced in at mortgage rates. So much so that it actually increased over the past week in a sort of “sell the news” correction.
Are mortgage rates still falling?
Recently issued by Fitch Ratings He said A 50 basis point Fed rate cut for both the 10-year Treasury yield and 30-year fixed mortgage rates has already been priced in.
Additionally, they argued that the 10-year yield, which historically tracks mortgage rates, has “less room to decline” because of this.
It has already fallen expectantly and it may be difficult to drop much lower. In fact, we have seen a rise since the Fed cut interest rates last week.
The 10-year yield was as low as 3.61% and is now holding around 3.77%, putting some moderate upward pressure on mortgage interest rates since then.
In fact, interest rates appeared headed for the high 5% range before retreating towards 6.25%.
With so little economic data released this week, there was no reason for interest rates to rise.
But next week we will get the employment report, which could help interest rates resume their downward trajectory if they come in weak.
Mortgage rates may be as low as 5% by 2026
If the 10-year yield is not expected to improve much from here, mortgage rates will only be able to fall with better spreads.
Currently, mortgage spreads are wide due to high prepayment risk, volatility and general uncertainty.
Investors are demanding a premium for buying mortgage-backed securities (MBS) versus government bonds, and have recently been asking for much more than usual.
Fitch estimates the typical spread at around 1.80%, while I have long said it is around 170 basis points. Either way, it is significantly higher today.
It was nearly 300 basis points at its worst in 2022. It has since shrunk to around 240 basis points, meaning it is about halfway back to normal.
So, if bond yields really stay where they are, you’ll need some normalization in spreads to move mortgage rates lower.
It is certainly possible, as I wrote a few weeks ago, to result in mortgage rates falling about 0.50% from current levels.
This would put the 30-year fixed term in the high 5% range, and even lower if the borrower is willing to pay discount points.
Mortgage rates are unlikely to fall below 5% before 2027
The rating agency also announced that mortgage rates are unlikely to fall below the high 5% threshold before 2027.
This means at least two more years of “high rates” before mortgage rates become a concern.
Again, this is because the 10-year bond yield is expected to remain mostly flat and only fall to around 3.50% by the end of 2026.
If spreads return to normal by then, you can do the math and come up with a rate of about 5.30% (3.5 + 1.8).
Of course, all of this is just speculation and many of these predictions have been wrong in the past. In fact, they are rarely right. Most of them were wrong on the way to 3% and on the way to 8%!
So who’s to say they’ll be right this time too?
I’m a little more optimistic about mortgage interest rates because I think there are a lot of expected rate cuts from the Fed over the next 12 months that have not been fully implemented.
As happened with mortgage rates rising from less than 3% to 8%, the market was caught by surprise. This can happen on the way down as well.
I can envision the 10-year yield falling to the lower 3% range next year, when combined with some spread pressure putting the 30-year fixed yield in the mid-5% range.
Once you calculate the points, you’ll find a lot of quotes in the high 4% range. For most homebuyers, this will be acceptable.
But I have long argued that interest rates are no longer the main sticking point. Housing prices may be too high in many markets, coupled with a shock to insurance, taxes, and everyday goods.
Without a small drop in home prices, it will remain difficult for those looking to buy into the market, especially if the broader economy deteriorates.
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My work experience in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and current) homebuyers better navigate the home loan process. Follow me on Twitter for hot takes.
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