Mortgage spreads
Mortgage spreads — the difference between the 10-year Treasury yield and the 30-year mortgage rate — are a complex topic. Over the past decade, they haven’t received much attention because spreads were typical and not a concern. Under normal circumstances, the spread typically ranges from 1.60% to 1.80%. A historical review of these spreads shows that they are currently elevated.
If the spreads were as bad now as they were at the peak of 2023, mortgage rates would currently be 0.75% higher. Conversely, if the spreads returned to their normal range, mortgage rates would be 0.55% to 0.75% lower than today’s level — that would mean nearly 6% mortgage rates.
For 2025, I was looking for the spreads to improve only 0.27%-0.41% from a base average of 2.54% in 2024. That hasn’t happened so far this year. For the spreads to improve in the future, we need the markets to be calm and get more Fed rate cuts into the system.
10-year yield and mortgage rates
In my 2025 forecast, I anticipated the following ranges:
- Mortgage rates will be between 5.75% and 7.25%
- The 10-year yield will fluctuate between 3.80% and 4.70%
The 10-year yield experienced fluctuations this week, surpassing 4.50% before dropping back down. However, mortgage rates remained relatively stable due to improved mortgage spreads, which help mitigate the impact of rising yields. On Friday night, Moody’s downgraded U.S. debt, causing the 10-year yield to increase by a few basis points. We’ll see how the markets react to this on Monday.
Technically speaking, this downgrade doesn’t change the status of those holding U.S. Treasuries, so many market participants are not overly concerned about it. However, the timing was not ideal, as the Republicans are working on their budget this weekend.
Purchase application data
Purchase application data was up 18% year over year last week, coming off a 13% year-over-year print the previous week. I traditionally weigh the purchase application data from the second week of January to the first week of May, since volumes tend to fall after May. So, seeing this growth with elevated rates is a surprise. Usually, we see this type of data when mortgage rates move from 6.64% toward 6%. Remember, the purchase application data looks out 30-90 days, so you won’t see this in this week’s existing home sales report or possibly even next month’s either.
Here is the weekly data for 2025:
- 9 positive readings
- 6 negative readings
- 3 flat prints
- 15 straight weeks of positive year-over-year data
Total pending sales
The latest weekly data on total pending sales from Altos provides valuable insights into current trends in housing demand. Typically, it takes mortgage rates nearing 6% to foster real growth in the housing market. While total pending home sales are slightly higher than last year, it is surprising to see this data remain steady despite elevated rates in 2025. Fortunately, mortgage spreads have improved from the high levels seen in 2023; otherwise, we wouldn’t have this conversation.
Weekly pending sales for the last week over the past several years:
- 2025: 409,896
- 2024: 400,653
- 2023: 387,251
Weekly housing inventory data
In great news for the housing market in 2024 and 2025, we’re seeing an increase in inventory! It’s a positive step toward getting things back to normal levels, just like we had before the pandemic. More homes available should help the market work more smoothly over the long run. Let’s celebrate this seasonal uptick in inventory as a step in the right direction!
- Weekly inventory change (May 9-May 16): Inventory rose from 755,895 to 767,274
- The same week last year (May 10-May 17): Inventory rose from 568,557 to 578,015
- The all-time inventory bottom was in 2022 at 240,497
- The inventory peak for 2025 is 767,274
- For some context, active listings for the same week in 2015 were 1,124,747
New listings data
Another positive development for 2025 is that new listing data is on the rise. Last week, we reached the minimum forecast of 80,000 listings during the seasonal peak period. Although there was a slight decrease last week, it’s encouraging to note that both new listings data and purchase applications are up compared to last year. This hasn’t occurred over the last few years. We can attribute this growth to the improvements in mortgage spreads.
To give you perspective, during the years of the housing bubble crash, new listings were soaring between 250,000 and 400,000 per week for many years. The growth we see in new listings data is just trying to return to normal, where the seasonal peaks range between 80,000 and 110,000 per week. The national new listing data for last week over the previous several years:
- 2025: 76,112
- 2024: 67,530
- 2023: 59,072
Price-cut percentage
In a typical year, about one-third of homes undergo price reductions, highlighting the housing market’s dynamic nature. As inventory levels increase and mortgage rates rise, many homeowners are making adjustments to their sale prices.
In my 2025 price forecast, I anticipated a modest increase in home prices of around 1.77%. This means yet another year of a negative real home prices for 2025. What can make my forecast wrong is a drop in mortgage rates to near 6%, which can make my forecast too low again. In 2024, my price forecast of 2.33% was incorrect as it was too low, and I lost it when mortgage rates headed toward 6%.
The increase in price cuts this year compared to last reinforces the validity of my conservative growth forecast for 2025. Below is a summary of the price cuts from previous weeks over the last few years:
- 2025: 37.4%
- 2024: 34%
- 2023: 30%
The week ahead: Debt downgrade, Fed speeches and home sales
We will see how the market handles the debt downgrade on Sunday night and Monday morning, and we’ll also get any update on the new budget. We have a lot of Fed presidents talking this week as well and we always like to monitor how the market reacts to their take.
We also have both existing and new home sales reports coming up. The existing home sales report for April might disappoint a tad from expectation and remember the growth we have seen in purchase apps recently looks out 30-90 days. We always keep an eye out on jobless claims data, which came in ok this last week.
Hopefully, the stock and bond markets will behave this week, as mortgage spreads have improved. With the 10-year yield still elevated, the housing market needs these spreads to stay at the low 2025 levels.
