Key facts
- Mortgage spreads are the most critical factor for housing in 2026, 2027, and 2028.
- Mortgage spreads improving have kept rates below 8% and could lead to rates below 7%.
- A worsening of mortgage spreads would be a negative story for the housing market.
- The 10-year Treasury yield is a key level to watch, with 5.40% identified as a base case for 8% mortgage rates if geopolitical tensions escalate.
- Monetary policy actions are transmitted to the real economy through various interest rates, including the 30-year mortgage rate.
- The difference between the 30-year primary mortgage rate and the fed funds rate has varied significantly, from 70 to 600 basis points.
Mortgage spreads have become the central focus for the housing market's trajectory through 2026, 2027, and 2028, according to Lead Analyst Logan Mohtashami. These spreads are critical in determining how long high interest rates will persist and the pressure buyers and sellers will experience.
Last week saw significant volatility in the bond market, pushing mortgage rates to a high of 7.49% before settling at 7.43%. This movement was influenced by conflict headlines and hawkish statements from Federal Reserve officials. The 10-year Treasury yield, a key indicator, is being closely watched, with a level of 5.40% identified as a potential base case for mortgage rates to reach 8% if geopolitical tensions, particularly involving Iran, escalate.
Dallas Fed research indicates that mortgage rates are a crucial channel for monetary policy transmission. A model decomposing mortgage rate dynamics found that approximately 70% of the variation in mortgage spreads over 10-year Treasury yields can be attributed to three factors: the level of 10-year rates, the slope of the yield curve, and implied interest rate volatility. The research also noted that the difference between the 30-year mortgage rate and the fed funds rate has historically varied widely, from 70 to 600 basis points, highlighting that movements in this spread can significantly impact the pass-through of monetary policy actions to consumers. Despite a 175 basis point decrease in the fed funds rate since September 2024, mortgage rates have shown little net change, underscoring the importance of the spread's behavior.