Mortgage Rates Could Be Higher. So Why Aren’t They?

Freddie Mac reported the average 30-year fixed mortgage at 6.71% this week, up from 6.66% last week. The 15-year average was 6.04%.

Those rates are higher than buyers would prefer, but viewed over the long history of mortgage lending, the upper-6% range is not particularly extraordinary.

What makes today’s affordability challenge more difficult is the combination:

Higher home prices.

Higher property taxes.

Higher insurance costs.

And, particularly here in South Florida, condominium and HOA expenses that can add substantially to the monthly cost of owning a home.

But there is another side of this week’s mortgage story that I find much more interesting.

Given everything putting pressure on the bond market, mortgage rates could reasonably be higher than they are today.

Look at the 10-Year Treasury

The 10-year U.S. Treasury—the benchmark I watch most closely when thinking about mortgage rates—finished Thursday around 4.77%.

That is certainly higher than we would like to see.

But perhaps the more interesting observation is that it hasn’t gone considerably higher.

The market is dealing with inflation that remains above target, energy and geopolitical uncertainty, substantial federal borrowing, Treasury supply, and questions about monetary policy.

July consumer prices increased only 0.1% for the month, which was encouraging, but inflation was still 3.4% higher than a year earlier. Core inflation was 2.5%, while energy prices were nearly 15% higher year over year.

At the same time, employment data has been showing signs of cooling, which normally creates some downward pressure on longer-term rates.

So the bond market has forces pulling it in both directions.

And yet the 10-year has spent a considerable amount of time in roughly the same elevated range.

The Bond Market Has Already Heard a Lot of the Bad News

I think this is worth understanding.

Bond traders aren’t necessarily reacting dramatically every time another economic headline appears.

Why?

Because markets don’t price information simply because it’s bad or good.

They price what is different from what investors already expected.

Inflation is not a surprise.

Large federal borrowing requirements are not a surprise.

Geopolitical risk is not a surprise.

Energy uncertainty is not a surprise.

The bond market knows these things exist and has already incorporated a great deal of that risk into today’s yield.

That helps explain why individual pieces of economic news can produce movement during the trading day without necessarily breaking the 10-year Treasury out of its recent range.

But there’s another side to that.

What Happens When the Market Gets a Real Surprise?

When a market has already absorbed a lot of known information, incremental news may not move it very much.

A genuine surprise can.

If inflation were to reaccelerate unexpectedly, energy prices were to experience another significant shock, geopolitical risk materially worsened, or investors suddenly became more concerned about Treasury supply, yields could move higher quickly.

Conversely, a convincing deterioration in the economy or meaningful improvement in inflation could push yields lower.

But in the current environment, the market appears to require considerable evidence before accepting substantially lower long-term yields.

That creates an important distinction:

The bond market isn’t ignoring today’s risks. It has already priced many of them in. The bigger danger—or opportunity—is what happens when something arrives that it hasn’t priced in.

And Then There’s the Mortgage Spread

Now we get to the part of this story that directly affects borrowers.

Mortgage rates don’t simply equal the 10-year Treasury yield.

There is a spread between Treasury yields and mortgage rates.

That spread reflects investor demand for mortgage-backed securities, prepayment risk, servicing economics, market volatility, liquidity and other risks associated with mortgage lending.

Historically, that spread has often been in the neighborhood of 1.6% to 1.8%.

During the disruption of the last several years, it became dramatically wider.

Today, it has narrowed substantially.

HousingWire analyst Logan Mohtashami recently measured the spread at approximately 1.94%, much closer to historical norms than the levels we saw in 2023.

That narrowing is doing an enormous amount of work for borrowers.

Put the Spread Into Perspective

With the 10-year Treasury sitting in the upper-4% range, considerably wider mortgage spreads could easily put 30-year mortgage rates above 7%.

Instead, Freddie Mac is reporting 6.71%.

That is the interesting part.

Mortgage spreads have narrowed enough to absorb a meaningful amount of the upward pressure coming from the Treasury market.

So when someone asks why mortgage rates haven’t already moved materially above 7%, a major part of the answer is:

The spread.

It isn’t that the underlying interest-rate environment is particularly friendly.

It’s that the mortgage market is pricing loans much more efficiently than it did during the worst spread environment of the last several years.

Borrowers are benefiting from that.

Why Are Spreads Staying Narrow?

There isn’t one answer, and I don’t think we should pretend there is.

Investor demand matters.

Market volatility matters.

Prepayment expectations matter.

Servicing values matter.

Competition for mortgage business matters.

The mortgage-backed securities market itself matters.

What we can observe is the result:

Mortgage spreads have remained relatively tight, and that has kept consumer mortgage rates lower than the Treasury environment alone might otherwise suggest.

That’s an important distinction.

Treasury Is Working on Market Liquidity Too

There is also something happening behind the scenes in the Treasury market.

Beginning September 9, the U.S. Treasury plans to at least double the size of certain buyback operations involving longer-dated securities, increasing them from a maximum of $2 billion to at least $4 billion per operation.

Treasury says the objective is to provide additional liquidity support in the longer-duration market.

That does not mean Treasury gets to dictate where long-term interest rates trade.

It doesn’t.

Bond investors still decide what yield they require to own that debt.

Government actions can affect supply and liquidity.

But ultimately, the market determines the price.

And so far, bond investors have continued to demand relatively high long-term yields.

A Cushion, Not a Guarantee

This is the part borrowers should understand.

Narrower mortgage spreads are helping us today.

But spreads are not fixed.

They narrowed.

They can widen.

If the 10-year Treasury moves higher at the same time mortgage spreads begin widening, mortgage rates could move above 7% surprisingly quickly.

That’s why I wouldn’t tell anyone:

“Mortgage rates can’t go above 7%.”

Of course they can.

What I would say is:

Given the pressure already sitting underneath the bond market, tighter mortgage spreads are one of the primary reasons they haven’t already.

What Does This Mean for a Homebuyer?

Most people aren’t going to spend their morning analyzing Treasury auctions or mortgage-backed securities.

And they shouldn’t have to.

They usually ask me a much simpler question:

“What’s the rate?”

But there isn’t one mortgage rate.

The rate you receive depends on your credit, down payment, property, occupancy, loan program, points and how the transaction is structured.

And as we’ve been talking about recently, the interest rate is still only one piece of the bigger question:

What monthly housing expense works comfortably within your budget?

Once we know that, we can work backward.

What home price works?

How much should you put down?

What do you qualify for?

Would conventional, FHA or VA financing make more sense?

Should you pay points?

Could a seller concession improve the transaction?

What are the taxes, insurance and association expenses?

Those are the things that determine whether the transaction actually works.

The South Florida Reality

That is especially important here in South Florida.

A small change in mortgage rate may move the principal-and-interest payment.

But insurance, property taxes, condominium assessments and HOA expenses can sometimes move the total housing cost considerably more.

So focusing only on rate can give a buyer an incomplete picture.

The goal isn’t simply to find the lowest mortgage rate.

The goal is to structure the complete transaction around a payment and financial commitment that makes sense.

Smart Buyer Insight

This week’s market is a useful reminder that mortgage rates are driven by more than one headline.

The bond market has already absorbed a great deal of economic and geopolitical uncertainty.

The 10-year Treasury remains elevated but has stayed within a relatively contained range.

Mortgage spreads have narrowed.

And those tighter spreads are helping shield borrowers from some of the pressure coming from the Treasury market.

What happens next will depend less on another ordinary headline and more on whether something occurs that genuinely changes what investors believe.

Trying to predict that event is difficult.

Understanding your own numbers is not.

Bottom Line

Mortgage rates are around 6.7%.

Historically, that number by itself is not particularly extraordinary.

Today’s affordability challenge comes from the combination of mortgage rates, home prices, insurance, property taxes and other ownership costs.

But given the underlying pressure in the bond market, mortgage rates could also be considerably higher than they are.

Narrower mortgage spreads are a major reason they aren’t.

The bond market isn’t ignoring today’s risks.

It has already priced many of them in.

The question is what happens when something arrives that it hasn’t priced in.

That’s why trying to perfectly time the mortgage market remains such a difficult strategy.

Know what you can comfortably afford.

Know what you qualify for.

Understand the complete transaction.

Then make the decision based on the numbers that matter to you.

Rate is one component.

The transaction is the decision.

About the Author

Clay Edmonds is the Corporate Educator and Complete Mortgage Advisor at Complete Mortgage LLC in Hollywood, Florida, and the creator of MortgageSimplified.net. With over four decades of experience in real estate finance, Clay focuses on simplifying the mortgage process and helping borrowers and real estate professionals make smarter financing decisions. Solutions@MortgageSimplified.net