{"id":9775,"date":"2025-02-07T05:41:52","date_gmt":"2025-02-07T05:41:52","guid":{"rendered":"https:\/\/finderica.com\/?p=9775"},"modified":"2025-02-07T05:41:52","modified_gmt":"2025-02-07T05:41:52","slug":"mortgage-rates-back-below-7-but-pricing-remains-cautious","status":"publish","type":"post","link":"https:\/\/finderica.com\/?p=9775","title":{"rendered":"Mortgage Rates Back Below 7%, But Pricing Remains Cautious"},"content":{"rendered":"
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It\u2019s been a good couple of weeks for mortgage rates, which benefited from a delay on tariffs<\/a> and some favorable economic data.<\/p>\n

Between a slowing economy, reduced inflation, and the thought that the tariffs could be overblown, the 10-year bond yield has improved markedly.<\/p>\n

Since hitting its 2025 high of 4.81% on January 13th, it has since fallen a sizable 35 basis points in less than a month.<\/p>\n

This has been driven by cooler inflation\/economic data and less fear of tariffs and a wider trade war.<\/p>\n

However, mortgage rates haven\u2019t fallen by the same amount, which tells you there is a still a lot of defensiveness on pricing.<\/p>\n

Mortgage Lenders Remain Defensive on Pricing<\/span><\/h2>\n

\"elevated<\/p>\n

The 10-year bond yield is a good way to track mortgage rates, with the 30-year fixed moving in relative lockstep over time.<\/p>\n

However, over the past couple years mortgage rate spreads (the premium MBS investors demand) have risen considerably.<\/p>\n

Over much of this century, since at least the year 2000, the spread has hovered around 170 basis points on average.<\/p>\n

During late 2023, it widened to around 300 basis points (bps), meaning investors demanded a full 3% spread above comparable Treasuries, as seen in the chart above from Fitch Ratings<\/a>.<\/p>\n

This was largely driven by prepayment risk, and to some degree credit risk, such as loan default.<\/p>\n

But my guess is it has been mostly prepayments that MBS investors fear, because mortgage rates nearly tripled in about a year\u2019s time.<\/p>\n

In other words, the thought was these mortgages wouldn\u2019t have much of a shelf life, and would be refinanced sooner rather than later.<\/p>\n

The spread has since come in a bit, but is still around 260 bps, meaning it\u2019s nearly 100 bps above its long-term average.<\/p>\n

Simply put, pricing remains very cautious relative to the norm, and it has gotten worse over the past couple weeks.<\/p>\n

The spreads were actually making their way closer to the lower 200 bps-level before climbing again recently.<\/p>\n

Is There Too Much Volatility for a Flight to Safety?<\/span><\/h2>\n

As for why, I would guess increased uncertainty and volatility. After all, both Canada and Mexico faced tariffs last week before they were \u201cdelayed.\u201d But the tariffs on China are still in effect.<\/p>\n

While the market generally cheered this development, who\u2019s to say it doesn\u2019t flip-flop in a week?<\/p>\n

The same goes for all the government agencies being suspended or shut down, or the buyouts given to federal employees.<\/p>\n

For lack of a better word, there is a lot of chaos out there at the moment, which doesn\u2019t bode well for mortgage rates.<\/p>\n

They say there\u2019s a flight to safety when the stock market and wider economy is unstable or volatile, where investors ditch stocks and buy bonds.<\/p>\n

This increases the price of bonds and lowers their yield, aka interest rate. This is good for mortgage rates too based on the same principle.<\/p>\n

But there comes a certain point when conditions are so volatile that both bonds and stocks become defensive at the same time.<\/p>\n

Both can sell off and nobody really benefits, with consumers seeing the wealth effect fade while also facing higher interest rates.<\/p>\n

[Mortgage rates vs. the stock market]<\/p>\n

The 30-Year Fixed Could Be in the Low 6s Today<\/span><\/h2>\n

The big question is when can we see some stability in the bond and MBS market, which would allow spreads to finally come in?<\/p>\n

Some say the 10-year yield at around 4.50% today is fairly reasonable given current economic conditions.<\/p>\n

If that\u2019s going to more or less stay put, the only other way to get mortgage rates lower is via spread compression.<\/p>\n

We know the spreads are bloated and have room to come down, so that\u2019s what will be needed barring a contracting economy or much worse unemployment driving yields lower.<\/p>\n

Assuming the spreads were even close to their recent norms, say 200 basis points above the 10-year, we\u2019d already have a 6.5% 30-year fixed. Perhaps even a 6.375% rate.<\/p>\n

Those who opted to pay discount points could likely get a rate that started with a \u201c5\u201d and that wouldn\u2019t be half bad for most new home buyers.<\/p>\n

It would also be pretty appealing for those who purchased a home in late 2022 through 2024, who might have an interest rate of say 7 or 8%.<\/p>\n

In other words, there\u2019s a ton of opportunity just a tighter spread away. A lot of the heavy lifting on fighting inflation has already been done.<\/p>\n

So if we can get there, borrower relief is on the way. And mortgage lenders that have been treading water and barely surviving these past few years will possibly be saved as well.<\/p>\n

We just need clearer messaging and policy from the new administration, which will allow investors to exit their overly-defensive stance.<\/p>\n

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\"Colin<\/div>\n
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Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.<\/p>\n<\/div>\n<\/section>\n

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\"Colin<\/div>\n
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