HousingWire’s lead analyst, Logan Mohtashami, highlights several macroeconomic variables contributing to the range of mortgage rates in the coming year: economic growth, inflation, unemployment and the possibility of an outright recession.
One of the biggest predictors of 2024 was that many thought a recession was imminent. The headlines and conventional wisdom saw a recession around the corner from late 2021 and by late 2023, many had a certain recession. But the US economy defied expectations and continued to grow. As a result, loan rates remain incredibly high.
In contrast to the impact of expected recession on interest rates is the potential for inflation. In 2024, the prospect of inflation forced that The Federal Reserve keeping short-term interest rates high for a long time. Finally in September, the Fed began its tapering cycle. Almost at the same time, the markets began to expect Trump’s victory and broadly speaking, the market views Trump’s economic plans as deflationary. As a result, the yield on the 10-year treasury began to rise as the Fed began to cut.
Logan likes to point out that the Fed has not been “accommodative,” meaning the Fed is more focused on preventing inflation than cutting rates to stimulate economic growth and accelerate hiring. The Fed’s “pivot” from restrictive to accommodative has not yet occurred.
HousingWire’s Flavian Nunes points out how critical mortgage rates have been, even if indirectly, to Federal Reserve policy.
10 years and spread
Mortgage rates are loosely tied to the 10-year Treasury yield. By 2025, we expect the yield range to be between 3.4% and 4.50% for the 10-year. Logan points out that in the absence of any economic data indicating a recession is upon us, the 10-year yield is unlikely to fall below 3.40%. If the economy continues to outperform expectations, the yield could rise to 4.5%.
Mortgage rates trade at the rate paid on the 10-year Treasury note. The premium is known as the “spread.” As interest rates hit record lows during the crisis, spreads also fell sharply. As rates peaked in 2022, that volatility forced investors to demand higher interest rates on mortgages and spreads widened. Over the past three years, the base interest rate has increased and spreads have also increased. Homebuyer mortgage rates have been hit hard twice.
With interest rates stable, the spread to 2024 has decreased, from 291 points a year ago, to 238 points today. We expect stabilization in the underlying bond markets to allow mortgage spreads to continue to decline slightly through 2025. If within a year, the 10-year yield falls to the lower end of the expected range, say 3.5%, and the spread narrows. up to 225 points, those periods will show loans available at 5.75%.
The gradually declining spreads give us little hope that mortgage rates will affect the lower end of the range in our forecast for the year.
Unfortunately for homebuyers in the US housing market, it seems unlikely that the growing US economy, bond market and spreads will conspire to create an environment where mortgage rates drop enough to ease the affordability challenges many people have faced over the past three years. .
Read the entire HousingWire Housing Market 2025.
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