"However, the current labor data is showing even poorer performance than last year, as I discussed in our weekend Housing Market Tracker article. On a positive note, mortgage spreads are displaying better behavior in 2025, which is helping to mitigate the impact of rising bond yields. I often joke that if people see a mortgage spread, they should hug it and take a selfie with it, because mortgage rates would not be at 6.25% today if the spreads didn't improve."
"I was looking for improvements of 0.27%-0.41% in mortgage spreads this year from an average level of 2.54% last year. We have made significant progress in reducing mortgage spreads this year. Historically, mortgage spreads have ranged between 1.60% and 1.80%. We do have some more room to improve, as the chart below shows. The worst levels of the mortgage spreads were in the early 1980s, when they were near 6%, and we had mortgage rates of 18%."
"Bu we don't even have to go back that far. If the spreads today were as bad as they were at the peak of 2023, mortgage rates would currently be 0.81% percentage points higher. Conversely, if the spreads returned to their normal range, mortgage rates would be 0.49% to 0.69% lower than today's level. If we were at the best levels of normal spreads, we would have mortgage rates at 5.60% to 5.80% today."
Mortgage spreads have narrowed in 2025, helping offset rising 10-year yields and keeping mortgage rates near the mid-6% range. A targeted improvement of roughly 0.27–0.41 percentage points from a 2.54% average was sought, and meaningful progress has been achieved. Normal historical spreads of about 1.60–1.80% would imply mortgage rates near 5.60–5.80% if realized. Peak 2023 spread levels would add about 0.81 percentage points to current rates. Labor market data is weaker than last year, increasing the likelihood of a roughly 25 basis point Federal Reserve rate cut.
Read at www.housingwire.com
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