“The U.S. economy is showing continued resilience which, combined with debt ceiling issues, has led to higher mortgage rates this week,” said Freddie Mac chief economist Sam Khater. “Reduced affordability remains an issue for interested homebuyers, and homeowners seem unwilling to shed their low rates and put their homes on the market. If this difficult situation continues to limit supply, it could present an opportunity for builders to help address the housing shortage in the country.
US First Deputy Chief Economist Odeta Kushi analyzed the spread between mortgage rates and the 10-year Treasury yield and how it might evolve in the coming months.
“Since the end of the Great Recession, the 30-year fixed mortgage rate has remained on average 1.7 percentage points (170 basis points) higher than the yield on 10-year Treasury bonds,” Kushi explained. “However, this gap is not always constant. It typically widens during times of economic or geopolitical uncertainty, as is the case in today’s market. Since 2000, there have been 59 months, about 21% of the time, where the average spread was at least 200 basis points.
Kushi noted that the gap may narrow but not return to historic norms.
“It’s reasonable to assume that the spread and, therefore, mortgage rates will pull back in the second half of the year if the Fed takes its foot off the monetary tightening pedal and provides investors with more certainty,” she added. “However, the spread is unlikely to return to its historical average of 170 basis points, as some risks are here to stay.”
