The magic number for mortgage rates
For McKeveny and Hale, the magic number for mortgage rates is 6%. But, in order to get there, mortgage spreads must improve.
“If you are not focused on mortgage spreads, you probably should be,” McKeveny said. “The most recent data point from last week shows a 234 basis point spread between mortgage rates and the 10-year treasury yield. The good news is that we have compressed from north of 300-points in the highs of 2022 and 2023, but the long-term average is about 170-basis points. So, we have seen improvements, but we are still at elevated levels.”
If the 10-year treasury yield moves lower, economists believe mortgage rates would also decrease, but getting the 10-year yield to decrease is not that simple.
Hale, the founder and CEO of Mortgage Advisory Partners, attributes the stubbornness of mortgage spreads to the current uncertain regulatory and political environment creating volatility in the bond market. However, McKeveny said it is important to also keep tabs on what the Federal Reserve is doing.
“When we are looking at lower spreads, the Fed was an active buyer of mortgage backed securities (MBS), but clearly they aren’t today. That’s one of the bigger reasons why we do think there can be some additional improvement in spreads,” McKeveny said. “I think it will take time to get back to that ‘normal’ 170 basis points with the Fed not an active buyer. Additionally, many of the big banks follow what the Fed is doing, so there’s a lot of supply and demand dynamics influencing things.”
Affordability challenges
In addition to stubborn mortgage spreads holding back the housing market in 2025, Hale and McKeveny are also predicting continued affordability challenges for homebuyers, caused, at least partially, by those persistently high mortgage rates.
“On an income to monthly payment basis, 2024 was the worst year homebuyer affordability since the early 1980s. That sounds pretty bad,” McKeveny said. “But it is improving and the years of the strongest growth in existing home sales have occurred in periods of stress. That may not make sense, but it is the bounce off the bottom effect and it can be significant.”
Due to this, McKeveny and the folks at Zelman are expecting meaningful growth in home sales and origination volumes in 2026. That’s because affordability is hampering the ability to buy right now, the economists believe consumers are still in the market.
“There’s really no shortage of demand,” Hale said. “Said differently, there’s no shortage of desire for homeownership. That hasn’t gone away. What’s gone away is affordability.”
Housing inventory is key
Inventory is important in making the housing market more affordable, but it’s more complicated than just building more houses, McKeveny said.
“There is this narrative that the country is so underbuilt,” McKeveny said. “People throw out estimates, we need 2 million more homes, 5 million more homes, 10 million more homes. Our reaction to that is, that it might be true, but if those homes are not affordable, people cannot buy them.”
Given the many challenges, many builders have utilized mortgage rate buydowns to make their properties more affordable to prospective buyers. Hale and McKeveny noted how that has contributed to builders taking 16% of the market share for all home sales in 2024.
“That is actually the highest market share since 2006,” McKeveny said.
The builders present an opportunity for lenders to focus on fostering relationships with builders.
“The builder segment is going to continue to be a growing and significant portion of the origination market,” Hale said. “For those of you who do not have thoughtful, focused strategies around pursuing builder business, whether it’s forward commitments or something else, you need to look into that. I have several clients who use forward commitments with homebuilders to drive origination volume.”
First Time Home Buyer FAQs - Via HousingWire.com
