Economic Update: What is Happening with Mortgage Rates?


What Is Happening With 30 Year Mortgage Rates? Why Almost The Doubling Since The End Of 2021?

The cost of locking in a mortgage is an important facet of the American Dream and a vital part of the real estate industry. Thus, the doubling of 30-year mortgage rates in 2022 (with a spike since June) is an important principle to understand.
30 year mortgage rates tend to run parallel with 10-year Treasury yields (but at a spread higher over Treasuries). This makes sense because the 10-year Treasury is an all-weather beacon of the most current cost of money reflecting credit conditions, inflation, and demand for funds. The 30-year fixed mortgage then trades at a spread over the 10-year as this bond obviously has 20 additional years of debt service and a different debtor (a mortgagor versus the US government standing behind the credit worthiness of Treasuries).
Now the almost doubling of 30-year fixed rate mortgages from 3.5% at the start of this year to almost 7.0% has been more a function of the spread over Treasury widening versus a movement higher in 10 year Treasuries (said another way, 30-year rates are moving higher faster than 10-year Treasuries are moving higher). This spread widening is a function of banks and mortgage lenders raising their cost to borrow faster than the government, because banks are concerned that there is less clarity as to what value they are underwriting to. All mortgages are struck on a loan-to-value ratio and banks are concerned that real estate values are going to start to go down and thus are demanding higher interest rates (return on capital) in advance.
The current spread between 10-year Treasuries and 30-year Mortgages is now at 2.92%, matching the multi-year high last seen on December 31, 2008 (and also inline with levels last seen in 1986). See our chart from Freddie Mac.
Our conclusion is that we expect that 30 year mortgage rates will start coming down, as this decade+ high in spread over Treasury normalizes as banks get more comfortable in the new environment. This will coincide with lower real estate prices as we have discussed in recent articles.

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