Explaining Today’s Mortgage Rates

If you're keeping an eye on mortgage rates because you're aware of their influence on your borrowing expenses, you might be curious about their future prospects. Regrettably, there's no simple answer to this question as predicting mortgage rates has always been challenging.

There is a reliable way to predict changes in interest rates, which is through analyzing the correlation between the 30-Year Mortgage Rate and the 10-Year Treasury Yield. Since Freddie Mac began recording mortgage rates in 1972, this relationship has been demonstrated in the following graph:

Based on the graph, it is evident that over the past 50 years, the average difference between the two has been 1.72 percentage points, which is also referred to as 172 basis points. If you observe the trend line, it is clear that when Treasury Yield trends up, mortgage rates usually follow suit. On the other hand, when the Yield drops, mortgage rates tend to decrease as well. Although they generally move in sync, the gap between the two has remained around 1.72 percentage points for a long time. However, it is essential to note that the spread has been widening beyond the usual trend lately, as shown in the graph below.

If you're wondering why the spread is exceeding its usual average, it's mainly due to the uncertainty in the financial markets. Inflation, other economic factors, and the policies and decisions of the Federal Reserve (The Fed) are all affecting mortgage rates and causing the spread to widen.

Why Does This Matter for You?

Understanding the spread may seem technical and detailed, but it's important for homebuyers like you to grasp. Essentially, it indicates that there is potential for mortgage rates to improve presently, based on the typical historical difference between the two rates. Experts predict that this improvement will occur as long as inflation remains under control. As per Odeta Kushi, the Deputy Chief Economist at First American, this is the likely scenario.

“It’s reasonable to assume that the spread and, therefore, mortgage rates will retreat in the second half of the year if the Fed takes its foot off the monetary tightening pedal . . . However, it’s unlikely that the spread will return to its historical average of 170 basis points, as some risks are here to stay.”

Similarly, an article from Forbes says:

“Though housing market watchers expect mortgage rates to remain elevated amid ongoing economic uncertainty and the Federal Reserve’s rate-hiking war on inflation, they believe rates peaked last fall and will decline—to some degree—later this year, barring any unforeseen surprises.”

Bottom Line

If you’re either a first-time home buyer or a current homeowner thinking of moving into a home that better fits your current needs, keep on top of what’s happening with mortgage rates and what experts think will happen in the coming months.