Is This as Good as Mortgage Rates Get For Now?

Well,
it’s
been
over
a
week
since
the

Fed
cut
rates
and
mortgage
rates
went
up.

While
this
may
have
come
as
a
surprise
to
some,
seasoned
mortgage
industry
peeps
didn’t
bat
an
eye.

It’s
pretty
common
for
the
Fed
to
do
one
thing
and
mortgage
rates
to
do
another.

Without
getting
too
convoluted,
the
Fed
adjusts
short-term
rates
while
mortgages
are
long-term
rates,
aka
the
30-year
fixed.

In
other
words,
the
cut
(and
future
cuts
too)
were
already
priced
in
to
mortgage
rates.
So
much
so
that
they
actually
increased
over
the
past
week
in
a
sort
of
“sell
the
news”
correction.

Are
Mortgage
Rates
Still
Dropping?

Fitch
Ratings
recently
came
out
and

said
the
50-basis
point
Fed
rate
cut
was
already
priced
in
to
both
the
10-year
Treasury
yield
and
30-year
fixed
mortgage
rates.

In
addition,
they
argued
that
the
10-year
yield,

which
tracks
mortgage
rates
historically,
has
“less
room
to
decline”
because
of
that.

It
basically
already
came
down
in
anticipation
and
might
be
difficult
to
drop
much
lower.
In
fact,
we’ve
seen
it
rise
since
the
Fed
cut
last
week.

The
10-year
yield
was
as
low
as
3.61%
and
now
sits
around
3.77%,
putting
some
mild
upward
pressure
on
mortgage
rates
since
then.

Rates
actually
looked
destined
for
the
high-5%
range
before
pulling
back
and
inching
their
way
back
toward
6.25%.

And
with
little
economic
data
out
this
week,
there’s
been
no
reason
for
them
to
rally.

But
next
week
we
get
the
employment
report,
which
could
help
rates
resume
their
downward
path
if
it
comes
in
soft.

Maybe
Low
5%
Mortgage
Rates
By
2026

If
the
10-year
yield
isn’t
expected
to
get
much
better
from
here,

mortgage
rates
will
only
be
able
to
move
lower
with
better
spreads.

Currently,

mortgage
spreads
are
wide
because
of
high
prepayment
risk,
volatility,
and
general
uncertainty.

Investors
demand
a
premium
to
buy
mortgage-backed
securities
(MBS)
versus
government
bonds
and
recently
they’ve
asked
for
a
lot
more
than
usual.

Fitch
puts
the
typical
spread
at
about
1.80%,
while
I’ve
long
said
it’s
about
170
basis
points.
Either
way,
it’s
markedly
higher
today.

It
was
nearly
300
bps
at
its
worst
in
2022.
It
has
since
shrunk
to
about
240
basis
points,
meaning
it’s
about
halfway
back
to
normal.

So
if
bond
yields
do
indeed
stay
sticky
where
they’re
at,
you’ll
need
some

spread
normalization
to
get
mortgage
rates
to
move
lower.

It’s
certainly
possible,
and
as
I
wrote
a
couple
weeks
ago,
could
result
in
mortgage
rates
falling
about
.50%
from
current
levels.

That
would
put
the
30-year
fixed
in
the
high-5%
range,
and
even
lower
if
a
borrower
is
willing
to

pay
discount
points.

Mortgage
Rates
Unlikely
to
Fall
Below
5%
Before
2027

The
rating
agency
also
proclaimed
that
mortgage
rates
are
unlikely
to
fall
below
the
big
5%
threshold
before
the
year
2027.

That
means
at
least
another
two
years
of
“high
rates”
before
mortgage
rates
are
no
longer
a
concern.

Again,
that’s
because
the
10-year
yield
is
expected
to
stay
mostly
level
and
only
drop
to
around
3.50%
by
the
end
of
2026.

If
the
spreads
are
back
to
mostly
normal
by
then,
you
can
do
the
math
and
come
up
with
a
rate
of
around
5.30%
(3.5+1.8).

Of
course,
this
is
all
just
a
forecast
and
many
of
these
forecasts
have
been
wrong
in
the
past.
In
fact,
they’re
rarely
right.
Most
were
wrong
on
the
way
down
to
3%
and
the
way
up
to
8%!

So
who
is
to
say
they’ll
be
right
this
time
around
either?

I’m
a
bit
more
optimistic
on
mortgage
rates
because
I
think
there
are
a
lot
of
Fed
rate
cuts
projected
over
the
next
12
months,
which
haven’t
all
been
baked
in.

Similar
to
the
ride
up
for
mortgage
rates,
from
sub-3%
to
8%,
the
market
was
caught
off-guard.
This
could
happen
on
the
way
down
too.

I
can
envision
a
10-year
yield
dropping
to
the
lower
3%
range
next
year,
when
combined
with
some
spread
compression
puts
the
30-year
fixed
in
the
mid-5%
range
potentially.

And
once
you
factor
in
points,
lots
of
rate
quotes
in
the
high
4%
range.
For
most
home
buyers,
that
would
be
acceptable.

But
I’ve
long
argued
rates
are
no
longer
the
main
sticking
point.
We’ve
got
home
prices
that
are
perhaps
too
expensive
in
many
markets,
along
with
sticker
shock
on
insurance,
taxes,
and
everyday
goods.

Without
a
little
home
price
easing,
it’ll
still
be
a
tough
sell
for
those
looking
to
buy
into
the
market,
especially
if
the
wider
economy
deteriorates.