Mortgage rates are likely to remain above 6% even if geopolitical tensions ease as inflation pressures, Federal Reserve policy and mortgage spreads continue to limit how far rates can fall.
That’s according to remarks shared on stage Tuesday by HousingWire Lead Analyst Logan Mohtashami at the American Credit Union Mortgage Association (ACUMA)’s Make Your Mark Conference in Las Vegas.
Mohtashami said the recent increases in oil prices and gains for the 10-year Treasury yield have complicated the outlook for mortgage rates. Even if the conflict in the Middle East ends and oil prices fall back toward $68 to $70 a barrel, mortgage rates could remain around 6.5% to 6.75% until the Federal Reserve provides clearer guidance for lowering them.
“There’s not a lot of history of mortgage rates going below 5.75% for decades and decades,” Mohtashami said.
Spreads have narrowed from prior years
Mortgage rates have been affected by a combination of Treasury yields and mortgage spreads, which he said have improved substantially from the elevated levels seen during the 2023 banking crisis. If spreads were still at their worst levels of 2023, mortgage rates would be about 8.36% today, Mohtashami said.
Using the worst spread levels from 2024 would put rates near 7.96%, while last year’s worst levels would translate to roughly 7.87%.
Mohtashami said spreads generally deteriorate when the Federal Reserve aggressively raises rates or when credit markets begin to break down. Neither condition is currently producing the kind of stress seen during the financial crisis, he said.
The labor market is also unlikely to provide a catalyst for significantly lower mortgage rates in the near term. He pointed to the concept of “breakeven” job growth, meaning the number of jobs that need to be added to keep the unemployment rate relatively stable.
With that number now estimated at roughly 33,000 jobs per month or potentially lower, several weak monthly jobs reports could occur without producing a substantial increase in unemployment. Mohtashami said jobless claims are a more important indicator to watch for signs of a meaningful deterioration in the labor market.
Despite elevated mortgage rates, Mohtashami said housing market conditions have become healthier as home price growth has cooled and inventory has increased. “Home sales aren’t crashing anymore, and inventory is not escalating,” he said. “We’re just trying to get back to normal.”
He said the housing market is benefiting from a slower pace of inventory growth, which reduces the risk of either rapidly accelerating home prices or a sharp price decline.
Mohtashami also disputed the idea that the current housing market resembles the conditions that preceded the 2008 financial crisis. He pointed to credit performance, borrower equity and down payments as key differences.
About 40% of U.S. homes have no mortgage, he said, while aggregate homeowner equity is substantially higher than during the housing bubble. The loan-to-value ratio of mortgaged homes, meanwhile, is also far below the levels seen in the pre-recession days of 2006 to 2008, according to Mohtashami.
Affordability, not inventory, remains the constraint
Mohtashami said housing demand remains constrained primarily by affordability rather than a lack of homes available for sale. He also pushed back on the idea that homeowners with low mortgage rates are effectively locked into their properties and unwilling to sell.
Homeowners with mortgages below 4% represent a declining share of the market as existing borrowers sell their homes and move, he said. Baby boomers, Gen X, millennials and Gen Z continue to participate in the housing market, creating a steady flow of buyers and sellers.
“If there was an authentic mortgage rate lockdown, home sales would be around 1.86 to 2.24 million,” he said. “Nobody would sell their home and buy another home.”
Instead, the current market is constrained by the cost of financing and housing affordability, which could change as wage growth continues to outpace home-price growth and mortgage rates eventually move lower. Mohtashami said the recent moderation in home-price appreciation is a positive development because it gives household incomes more time to catch up with housing costs.
But a sustained decline in mortgage rates would require several factors to align, including an easing of geopolitical tensions, lower energy prices, and less pressure from tariffs and other sources of inflation.
The Federal Reserve’s response will also be important. For now, Mohtashami said the central bank remains constrained because economic growth has held up while commodity prices have created additional inflation concerns.
“We’re in a much healthier spot,” Mohtashami said. “As long as price growth cools down and wages rise, affordability gets better. When rates go a little bit lower, we’ve got growth for years.”
