Layla Zulfa
Housing demand continued its upward trajectory year-over-year in the past week, demonstrating a notable resilience despite a confluence of challenging economic and geopolitical factors. The market has navigated a landscape marked by the Federal Reserve’s increasingly hawkish stance, a significant escalation in the Iran conflict, and a persistent rise in mortgage rates, which have propelled the 10-year Treasury yield to yearly highs. Nevertheless, key housing metrics, including weekly pending sales, total pending sales, and purchase applications, have all registered positive year-over-year growth.
However, this growth has experienced a deceleration in recent weeks. This slowdown is largely attributed to mortgage rates breaching a critical threshold of 6.64%. The longer borrowing costs remain above this level, the more pronounced the cooling effect on housing demand becomes, a pattern observed consistently over the past few years. Despite these headwinds, the current state of the housing market, considering the surge in the Iran conflict and the Federal Reserve’s assertive monetary policy, can be characterized as holding steady. A significant mitigating factor, often dubbed the "housing hero story of the year," has been the improvement in mortgage spreads throughout 2026, a phenomenon that has helped to temper the impact of rising yields.
The Crucial Role of Mortgage Spreads
To fully appreciate the current housing market’s performance, understanding the dynamics of mortgage spreads is essential. Had these spreads not improved as they typically do at this stage of the economic cycle, the reported housing data would present a significantly different picture. The only reason mortgage rates were able to hover near 6% in the years 2023, 2024, 2025, and 2026 was primarily due to economic and labor growth scares that pushed the 10-year Treasury yield below 4%. This was not a direct result of Federal Reserve policy but rather the bond market attempting to preemptively counter what it perceived as overly restrictive monetary policy from the central bank.
In preceding years, mortgage spreads deviated significantly from their historical norms. This divergence allowed mortgage rates to easily surpass 7% whenever economic data showed signs of improvement. However, 2026 marked a departure from this trend, with forecasts predicting rates would remain below 7%, a shift directly attributable to the noted improvement in mortgage spreads. Even with the 10-year Treasury yield currently at 4.74%, a hawkish Federal Reserve, and a Middle East crisis that has twice sent Brent Crude oil prices above $100 per barrel, mortgage rates have largely stayed below the 7% mark. This containment is a direct consequence of enhanced mortgage spreads. Given that housing demand typically falters when mortgage rates exceed 7%, the current stability of these spreads is a critical, albeit often overlooked, factor supporting the market.
Historically, mortgage spreads have typically fluctuated between 1.60% and 1.80%. In the most recent week, these spreads stood at 2%, a slight increase from the 1.94% recorded the week prior. This widening of the spread, while potentially contributing to slightly higher rates than if spreads were narrower, has still played a crucial role in preventing rates from climbing into prohibitive territory.
To illustrate the impact, consider the difference mortgage rates would have presented over the past three years if the 10-year yield had been at its current level but spreads had followed historical patterns. This comparison underscores the substantial benefit derived from the improved spread environment in 2026.
The Second Pillar of Support: Wage Growth Outpacing Home Prices
Beyond the favorable mortgage spread environment, a second significant variable has bolstered the housing sector: wages have consistently outpaced home-price appreciation over the past two years. While national nominal home prices have not experienced a decline, their growth has been remarkably subdued, registering between 1% and 2% last year and a similar range this year. Certain regions have seen higher appreciation, while others have experienced declines. Nevertheless, this trend has contributed positively to housing affordability.
A hypothetical scenario highlights this point: had home prices grown at the more aggressive rates seen in 2020 and 2021 (10% and 19%, respectively) instead of the more modest figures of recent years, housing affordability would be considerably worse. If home prices were escalating at a faster pace than wage growth, it would be difficult to assert that the market is currently in a healthier condition.
10-Year Yield and Mortgage Rates: Navigating Volatility
The 2026 HousingWire forecast had anticipated specific ranges for the 10-year Treasury yield and corresponding mortgage rates. With the escalating conflict in Iran and a more hawkish Federal Reserve, the 10-year yield has moved above 4.60%, pushing mortgage rates above 6.75%. The bond market has reacted negatively to the geopolitical instability in Iran, particularly given its inflationary implications. Earlier analyses had detailed the challenges in pushing mortgage rates above 7%, suggesting that even a worsening conflict would likely only add a modest increment of 0.375% to 0.43% to the forecast of 6.75%. Current data, with mortgage rates reaching 6.83%, is testing this theoretical ceiling, reflecting an increase of approximately 0.08% from the baseline forecast.
For those seeking stability and lower mortgage rates, a resolution to the conflict in Iran is paramount. The current geopolitical uncertainty exacerbates concerns among hawkish Federal Reserve members, who are already wary of inflationary pressures. The Federal Reserve’s monetary policy remains a key determinant of future rate movements, with any indication of a sustained increase in inflation or a lack of progress in resolving geopolitical tensions likely to reinforce their restrictive stance.
Weekly Pending Sales: A Pulse on Near-Term Activity
The weekly pending home sales data provides a valuable week-to-week perspective on market activity, though it is susceptible to short-term fluctuations, including holiday impacts. This data typically influences broader sales figures with a lag of 30 to 60 days.
While the housing market is indeed experiencing a slowdown, the pace of this deceleration has not been substantial. Last week’s data still indicated year-over-year growth, although the magnitude of this growth has diminished. The comparative figures for the remainder of the year are expected to become more challenging, as mortgage rates were on a downward trend during this period last year. Factoring in current higher rates, a sustained period above 6.64% will likely lead to further moderation in year-over-year growth figures for the rest of 2026.
Total Pending Sales: A Broader Market Trend
Total pending sales, representing a more smoothed-out trend, are influenced by the weekly pending home sales data, which tends to lead. For 2026, this aggregate metric continues to show growth, albeit tempered by elevated mortgage rates. Should rates remain at their current elevated levels, this trend is expected to cool further.
Mortgage Purchase Application Data: A Forward-Looking Indicator
Mortgage purchase application data, which offers a glimpse into market activity 30 to 90 days ahead, exhibited some weakness last week. It declined by 4% week-over-week while still maintaining a modest year-over-year growth of 3%. The year-over-year growth percentages were more robust when mortgage rates were lower. It is important to note that the comparative figures for the remainder of 2026 and into 2027 will become more challenging, as much of the current year has demonstrated positive year-over-year growth.
Housing Inventory: A Gradual Return to Normality
Housing inventory levels have shown a significant slowdown in growth since mid-June 2025. However, with the recent uptick in mortgage rates, inventory growth has seen a slight acceleration, standing at 0.85% year-over-year. The easier year-over-year comparisons after mid-June 2026 contribute to this observed growth.
Traditionally, periods of lower interest rates and increased mortgage demand make it more challenging to grow inventory. The U.S. housing market experienced a record low in active listings in March 2022. Currently, inventory levels are approaching more normalized figures, with data indicating over 1 million active listings during the typical seasonal peak months. This gradual replenishment of inventory is a healthy development for market balance.
New Listings: A Sign of Market Maturation
The seasonal decline in new listings has become apparent. Historically, peak weeks would see between 80,000 and 100,000 new listings enter the market. This year, the market has only surpassed 80,000 new listings on four occasions, and never in consecutive weeks. Despite this, the volume of new listings is significantly healthier than what was observed in 2023. It is important to remember that most sellers are also homebuyers, making a return to normal listing levels a positive indicator for overall market function.
For context, those drawing parallels to the housing bubble years should note that new listings during that period ranged from 250,000 to 400,000 per week for several consecutive years. The current levels are far removed from such speculative excesses.
Price-Cut Percentage: Reflecting Market Dynamics
Typically, approximately one-third of homes experience price reductions before being sold, a reflection of the market’s dynamic nature. For much of 2026, the percentage of homes undergoing price cuts has been lower compared to the previous year. However, as mortgage rates have risen year-over-year, the rate of decline in price-cut percentages is expected to compress, potentially reaching parity or even increasing year-over-year if rates continue their upward trend.
The 2026 home price forecast had initially predicted a national decline of -0.62%. Home price growth has largely stagnated this year, with most home price indexes showing appreciation between 1% and 2%. However, the recent resurgence in mortgage rates could bring the forecast of a slight national price decline back into play for the latter part of 2026. The price-cut percentage for the past week offers a snapshot of this evolving market sentiment.
The Week Ahead: Geopolitical Uncertainty and Labor Market Focus
The upcoming week presents a critical juncture with the convergence of key economic indicators and escalating geopolitical tensions. The bond market, which initially showed muted reactions to the Iran conflict, has become increasingly sensitive to negative news, especially regarding its inflationary implications. This heightened sensitivity is driven by deep concerns among hawkish Federal Reserve members about the potential for sustained price pressures.
This week also marks "jobs week," a period when labor market data takes center stage. While the significance of employment figures remains, their impact will be weighed against the backdrop of a highly hawkish Federal Reserve and a conflict that is nearing its six-month mark. Further Federal Reserve speeches are scheduled, and their pronouncements will carry considerable weight, particularly as hawkish members are reportedly just four votes away from securing a rate hike in September. The interplay between labor market strength, geopolitical risks, and monetary policy will be closely scrutinized by market participants.
