Talk Spreads to Me: How Narrowing Spreads Could Change Your Mortgage Rates

The spreads are closing and that’s actually good news. Today I’m going to focus on interest rates -what’s happening with them right now and how it’s impacting the real estate market. Plus what’s likely to happen to them and how that’s likely to impact the market. Now if you have no clue what spreads have to with rates, don’t worry – just stick around. We’re not talking about butter or cream cheese; we are talking about a window of opportunity closing. 

Talk Spreads to Me 

Much of the focus when it comes to interest rates is on Fed policy. Since you’re not new here, you know that the Fed Funds rate is not the equivalent of the mortgage interest rate a consumer will be offered on a 30-year fixed loan. But the Federal Reserve’s monetary policy – what they do with their balance sheet and where they keep the Federal Funds rate at – definitely impacts demand for mortgage bonds. 

If we’re talking about interest rates and we aren’t talking about the Fed, then most likely you’re in a more intellectual conversation with someone who passed Econ 101 with a grade above 60%. In that scenario, you’re likely talking about a recession because it times of economic uncertainty – the demand for mortgage bonds has historically improved, bringing mortgage interest rates down. If this hypothetical conversation you are in is with someone especially well versed on the way money works, then you’re debating the odds of a job loss recession and how that would impact the economy and in turn interest rates. 

Here's what people don’t often talk about but should be right now. The spread between the yield on the 10-year treasury and the 30-year fixed rates. I’ve broken this down in layman’s terms on a previous blog, so I won’t rehash it but long story short: 

Normally there is a 1-2% difference between the 10-year treasury yield and the rate available for a 30-year fixed mortgage. This means if the yield was at 4.28% like it is today – you could see mortgage rates at like 5-5.5%. That’s the historically normal spread. As you may know, rates are not in the 5’s right now. They are at 6.5%. That’s almost 2.5% on the spread which is lame but not the worst it’s been. In 2008 the spread hit almost 3% and it did pretty close to that at the onset of the 2020 Covid-19 panic. 

A larger spread represents higher borrowing costs for homebuyers…a smaller spread would mean lower interest rates – without any action from the Fed. The spread has started closing and it’s something you should be watching very closely because it’s another predictor of where interest rates are going. 

Why obsess about rates? 

I know, I know – I’m always here telling you not to time the market. But I’ve also really, really enjoyed helping my buyers get deals for the past couple of months. So I’m having some feelings about this window of opportunity closing as interest rates come down. Yes, I love lower rates and refinances. But we all need to beware of what that means for supply and demand and what’s likely to happen to home prices as buyers come back into the market. I initially typed flood back into the market but decided to tone down the drama. 

Will she narrow or widen? 

Was calling the spread a “she” going too far? I know words can be very charged these days. The spread closing is conducive to lower rates and we’ve already seen this trend begin, which has resulted in an increase in mortgage applications. As mortgage demand picks up, this could create a snowball because more demand for mortgages increases lender competition. That compresses margins which work to close the spread. 

There is also more clarity now on Fed policy with a September rate cut at almost 80% probability. That decreases volatility and requires less cushion over Treasuries – also narrowing the spread.  

On the other hand, economic volatility, which seems to be our President’s preferred method of business, will widen that spread right back out. We saw this at the beginning of the year when spreads started to trend in the right direction, but then economic and policy shock waves rolled through financial markets and flipped our progress. 

New Fed Governor 

In other interest rate related news…. We are getting a new Fed Governor. Now this is not a replacement for Powell. Jerome Powell is still in action. His term ends in May of 2026 but he has not resigned or been fired, as of yet. This week Fed Governor Kugler stepped down 6 months before her term ended. This gave Trump the opportunity to appoint a new governor and he chose Stephen Miran. We do know they are chummy, but Senate has to confirm this appointment. We aren’t sure if this will happen prior to the next Fed meeting on September 16^th. 

There was lots of news earlier this week, which I summed up on Property Pursuits. Check out the recording if you missed it! Also be sure to check out the free virtual event we are hosting in my Inner Circle next week. It’s called Straddling the Paradox and it’s open to women everywhere.