Where do mortgage rates go from here?

"For most of the year, the 10-year yield and 30-year mortgage rates have acted perfectly normally, with job growth slowing down. The 10-year yield peaked around 4.79% and mortgage rates have ranged between 6.13% and 7.25%. As the year has progressed, the 10-year yield has trended down toward 4% and has adequately accounted for the softening of the labor data."

"Last week, the 10-year yield experienced a relatively calm week considering the fireworks of Fed week. It began at around 4.07% but then dropped to around 4%. This surprised me, especially after the stronger-than-expected retail sales report last Tuesday. Following the Fed's press statement and Jerome Powell's comments, the bond yield rose and ended the week at 4.13%. While this change wasn't dramatic, the real activity took place in the mortgage spreads."

"For my 2025 forecast, I expected a 0.27% to 0.41% improvement in mortgage spreads, based on an average of 2.54% for 2024. With the current level at 2.19%, we have already reached the target level for 2025. This week, there was significant volatility in the spreads that isn't fully captured in this weekly chart. To simplify, the spreads improved considerably before the Federal Reserve meeting but then lost that extra favorable pricing."

2025 forecast anticipated mortgage rates between 5.75% and 7.25% and the 10-year Treasury yield between 3.80% and 4.70%. For most of the year, the 10-year yield peaked near 4.79% while 30-year mortgage rates ranged from 6.13% to 7.25%. The 10-year yield has trended toward 4% as labor data softened. Mortgage spreads improved materially, lowering effective mortgage pricing; current spreads stand at 2.19%, matching the 2025 target and exceeding the expected 0.27–0.41% improvement. Spreads were volatile around the Federal Reserve meeting, and if spreads reverted to 2023 peaks, mortgage rates would be about 0.91 percentage points higher.

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