Key facts
- Mortgage rates are currently above 7%, with potential to reach 8% or fall to 6%.
- The 10-year Treasury yield would need to approach 5.40% for mortgage rates to reach 8%.
- Historically, mortgage spreads have ranged from 1.60% to 1.80%, but were at 1.97% last week.
- Pending home sales in 2026 were 62,300, down from 64,391 in 2025.
- Purchase applications were down 19% year-over-year in the latest week.
- Housing inventory rose from 873,978 to 890,303 in the week of September 11-18.
Mortgage rates have climbed back above 7%, a level that was expected to be mitigated by mortgage spread dynamics in 2026. However, ongoing geopolitical conflict, elevated oil prices at $100, inflation exceeding targets, a 4.1% unemployment rate, and the Federal Reserve's initiation of a new rate-hike cycle are creating significant uncertainty.
Analysts are weighing scenarios for mortgage rates to reach 8% or fall to 6%. The path to 8% hinges on the worsening of the conflict with Iran, potentially pushing the 10-year Treasury yield towards 5.40%, a level not seen since March 2002, coupled with solid economic data and slightly wider mortgage spreads. The Federal Reserve's stance on rising long-bond yields would also be a factor.
Conversely, a move towards 6% would likely require an end to the conflict, a decrease in oil prices, and signs of labor market and economic slowdown, which would allow yields to fall. The author's base case, assuming the conflict ends and oil prices decrease, projects mortgage rates between 6.50%-6.75% with the 10-year yield around 4.48%.
Mortgage spreads, which have attempted to buffer rate increases, were at 1.97% last week, up from 1.90% the prior week, compared to historical ranges of 1.60%-1.80%. If 2023's worst spread levels had persisted, mortgage rates would be 8.34% today, not the current 7.20%. Pending home sales and purchase applications show year-over-year weakness, consistent with rates above 7%, while housing inventory is showing modest growth.