The difference between mortgage rates and the 10-year treasury yield has narrowed, signaling a potential boost for homebuyers. A decrease in the mortgage spread can cause mortgage rates to fall, even without the Fed cutting interest rates.
The gap between 10-year treasury yields and mortgage rates (known as the mortgage spread) has dropped to its lowest level in over three years, allowing mortgage rates to fall more than treasury yields. The spread was 2.26 percentage points as of August 22, down from about 2.5 at the start of summer and 2.68 a year earlier.
That’s good news for house hunters and homeowners looking to refinance because, setting aside Fed policy, it means mortgage lenders are offering lower rates.
The mortgage spread fell to around 1.5 percentage points–lower than usual–in 2021, when mortgage rates were sitting at record lows. It doubled in 2022 and 2023 to levels usually seen during financial turmoil because mortgage rates increased, markets became more uncertain, and lenders were trying to hedge their risks by charging more interest.
Now, the spread is slowly falling but it has more room to fall before returning to more typical levels, around 1.5-2 percentage points. That means there’s more potential for mortgage rates to fall more than treasury yields.
“Think of the spread like a restaurant meal,” said Chen Zhao, Redfin’s head of economics research. “The treasury yield is the cost of raw ingredients, the mortgage rate is the price of the meal on the table, and the spread is the restaurant’s markup, which covers the cost of the chef, rent on the restaurant, profit margin, etc. Regardless of the cost of raw ingredients, if the restaurant has a lower markup, that lowers the customer’s bill. Similarly, regardless of the Fed’s actions, a lower mortgage spread helps lower mortgage rates.”
Why the Mortgage Spread Dropping Matters For Homebuyers and Homeowners
A lower mortgage spread equals lower mortgage rates. If the spread continues to decline, mortgage rates could fall more than they already have.
“It’s important to note that if the Fed cuts interest rates as expected in September–or more than expected–mortgage rates may fall more than anticipated because the spread is also falling,” Zhao said.
It’s also worth noting that we’re in a buyer’s market, with many sellers open to negotiations, including lowering their price, because many homes have been sitting on the market for a long time. Combined with lower rates, now may be a good time to lock in a lower monthly housing payment.
A homebuyer on a $3,000 monthly budget can afford a $439,000 home with a 6.55% mortgage rate, roughly today’s average. That means that homebuyer has gained roughly $20,000 in purchasing power since May, when rates hit a recent peak of 7.08%.
Redfin agents in some parts of the country have reported that homebuyers started responding to lower mortgage rates over the weekend.
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Dana Anderson